MORGAN STANLEY UNIVERSAL FUNDS INC, N-30D, 1998-02-26

MORGAN STANLEY UNIVERSAL FUNDS INC
N-30D, 1998-02-26

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<PAGE>
MORGAN STANLEY
UNIVERSAL FUNDS, INC.

ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
TABLE OF CONTENTS

- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Overview and Statement of Net Assets by Portfolio:
Asian Equity Portfolio.............................................. 1
Emerging Markets Equity Portfolio................................... 7
Global Equity Portfolio............................................. 14
International Magnum Portfolio...................................... 21
Equity Growth Portfolio............................................. 28
Mid Cap Value Portfolio............................................. 34
U.S. Real Estate Portfolio.......................................... 39
Value Portfolio..................................................... 45
Emerging Markets Debt Portfolio..................................... 51
Fixed Income Portfolio.............................................. 56
High Yield Portfolio................................................ 61
Statement of Operations and Changes in Net Assets..................... 65
Financial Highlights ................................................. 76
Notes to Financial Statements......................................... 87
Report of Independent Accountants..................................... 92
Federal Tax Information............................................... 93
Directors and Officers................................................ 94
</TABLE>
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
COMBINED FAR EAST FREE EX-JAPAN INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
China 3.0%
Hong Kong 38.5%
India 0.5%
Indonesia 2.9%
Korea 2.6%
Malaysia 5.8%
Philippines 5.6%
Singapore 14.9%
Taiwan 15.3%
Thailand 3.4%
Other 7.5%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------------------- ------------- ----------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 12.9%
HSBC Holdings plc Hong Kong 5.2%
China Light & Power Co., Ltd. Hong Kong 4.8%
Hutchison Whampoa Ltd. Hong Kong 4.2%
Asustek Computer, Inc. Taiwan 4.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Finance $4,559 36.3%
Capital Equipment 1,792 14.2%
Consumer Products 1,530 12.2%
Technology 1,441 11.5%
Multi-Industry 795 6.3%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) COMBINED
FAR EAST FREE EX-JAPAN INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
-------------
<S> <C>
PORTFOLIO(3)............................ -43.52%
INDEX................................... -46.27%
</TABLE>

1. The MSCI Combined Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes dividends).
2. Total return for the Portfolio reflects expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on March 3, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
ASIAN EQUITY MSCI COMBINED FAR EAST
PORTFOLIO FREE EX-JAPAN INDEX 1
<S> <C> <C>
3/3/97* $10,000 $10,000
12/31/97 5,648 5,373
*Commencement of operations
</TABLE>

The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Asian
issuers (excluding Japan). The Portfolio intends to invest in equity securities
that are traded on recognized stock exchanges of countries in Asia and in equity
securities of companies, organized under the laws of an Asian country, whose
business is conducted principally in Asia.

For the period from March 3, 1997 (commencement of operations) through December
31, 1997, the Portfolio had a total return of -43.52% as compared to -46.27% for
the Morgan Stanley Capital International (MSCI) Combined Far East Free ex-Japan
Index (the "Index").

Asian markets witnessed a disastrous year in 1997, as the Index suffered its
largest yearly decline since its inception. Of the core East Asian markets, not
a single individual country managed a positive return for the year, as the
region's best performers were Taiwan (-6.3%) and Hong Kong (-23.3%). Five of the
nine countries encompassed within the Index suffered declines of more than 60%,
led by Indonesia (-74.1%) and followed by Thailand (-73.4%), Malaysia (-68.0%),
Korea (-66.7%) and the Philippines (-62.6%).

Though the meltdown in the region can be traced to factors which existed in many
countries, the collapse was precipitated by the de-pegging of the Thai baht on
July 2, 1997, which subsequently forced the currency and equity markets into a
vicious downward spiral. A large current account

1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

deficit coupled with unhedged U.S. dollar loans going into a property bubble
first attracted the speculators who eventually triggered the depreciation of the
currency. Despite a change of government and an International Monetary Fund
(IMF) led bailout package, the equity market remains badly beaten, down close to
90% from its peak two years ago. Though the IMF has been successful in closing
shaky financial institutions, a complete lack of confidence in the currency and
illquidity in the markets has led most international equity investors to desert
Thailand.

The currency depreciation quickly spread to other Southeast Asian countries,
most severely to Indonesia. Despite reasonably solid macroeconomic fundamentals,
domestic and international holders of the currency quickly fled to U.S. dollars,
forcing the rupiah down 56% by year-end. Indonesian corporates and banks with
large exposure to U.S. dollar-denominated debt led the market down, as interest
costs skyrocketed throughout the economy. The ensuing economic slowdown, as well
as concerns over the health of Indonesia's ailing patriarch Suharto, allowed
little upside to the equity market through year-end.

The contagion effect which lashed Southeast Asia quickly spread to Northeast
Asia with the Korean won depreciating by 47%. In the fourth quarter, the stock
market declined sharply amidst concern over the credit quality of the financial
sector and the ability of Korea to repay its foreign short-term obligations.
Korea's downturn was a result of the excessive expansion and over-leverage by
Korean chaebols, the business conglomerates of Korea, which comprise over 70% of
GDP. Several large chaebols entered into court receivership including Sammi,
Hanbo, Kia and Jinro with net debt to equity ratios well above 500%. In the
latter part of the year, the IMF stepped in and Korea was forced to undertake
quick liberalization and reform measures, including the opening of its capital
markets.

Lastly, even Hong Kong did not remain unscathed from the regional turmoil.
Though its currency board system allowed it to maintain the Hong Kong dollar peg
to the U.S. dollar, the cost was levied through a rapid increase in interest
rates. The equity market, dominated by interest sensitive stocks such as
property and banks, reversed the 20% return it had made through September and
plummeted to a final -25% performance for the year. Hong Kong property prices,
among the most expensive in the world dropped 30% in 4 months, as asset
deflation took the place of currency depreciation.

As the crash takes its initial victims in Association of South East Asian
Nations (ASEAN) to below 70% from their peaks, focus has now shifted to
North-East Asia. The imminent demise of the Korean economy (the 11th largest in
the world) as we know it today has finally awakened the world to the risk of a
worldwide contagion and begun to elicit some concerted response from the U.S.
and the international community.

At the same time, however, as the other currencies and markets fall, the
remaining markets like Hong Kong, Singapore and Taiwan are looking more and more
expensive and vulnerable. The risk in Hong Kong is that China is obviously
slowing rapidly and its currency peg to the U.S. dollar is exacting a heavy toll
on its economy. Should the U.S. equity markets crash, Hong Kong's position could
become untenable.

Similarly, should China falter, Taiwan would be seriously impacted, and its
problems compounded by the current weakness in the technology and electronics
area. Any fallout in the electronics area will also be problematic for Singapore
which is already contending with the devastation of its ASEAN partners and
hinterland.

We would therefore look to reduce our Hong Kong and China exposure and seek to
hedge our currency exposure to the Hong Kong dollar, the New Taiwan dollar and
the Singapore dollar. Concurrently, we would be seeking to put money to work in
selected stocks in the more devastated markets which are beginning to offer
compelling values for the patient investor.

2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

It is anticipated that 1998 will be a very difficult year for the region. The
effect of the fallout in the regional markets is just beginning to filter
through into the real economy and 1998 will be marked by corporate collapses and
massive layoffs which are likely to cause many of the economies to descend into
economic recessions and possible political and social unrest.

Although the currency turmoil and confidence crisis continues and there are no
signs of the stock markets stabilizing, the speed at which some of the regional
currencies and markets are sliding would seem to indicate a climatic condition.

It is therefore our view that now is not the time for serious investors to exit
these markets. Indeed, investors with the luxury of a longer term horizon stand
to reap considerable long term gains through capitalizing on this monumental
meltdown in the Asian markets.

Our strategy would be to concentrate on identifying for acquisition, the
companies and stocks that represent irreplaceable franchises which are currently
available at bargain prices.

January 1998

3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------

COMMON STOCKS (92.5%)
CHINA (3.0%)
243,000 Guangshen Railway Co., Ltd., Class H............. $ 64
233,000 Qingling Motors Co., Class H..................... 114
(a)451,000 Zhejiang Expressway Co., Ltd., Class H........... 91
178,000 Zhejiang Southeast Electric Power Co., Ltd.,
Class B........................................ 58
124,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 52
-------
379
-------
HONG KONG (38.5%)
248,000 Cheung Kong Holdings Ltd......................... 1,624
109,000 China Light & Power Co., Ltd..................... 605
81,000 Dao Heng Bank Group Ltd.......................... 202
110,000 Hong Kong Telecommunications Ltd................. 227
26,400 HSBC Holdings plc................................ 651
85,000 Hutchison Whampoa Ltd............................ 533
226,000 Ng Fung Hong Ltd................................. 238
35,000 Shanghai Industrial Holdings Ltd................. 130
55,000 Sun Hung Kai Properties Ltd...................... 383
42,000 Swire Pacific Ltd., Class A...................... 230
5,000 Television Broadcasts Ltd........................ 14
-------
4,837
-------
INDIA (0.5%)
900 Bajaj Auto Ltd. GDR.............................. 18
2,300 ITC Ltd. GDR..................................... 46
500 Tata Engineering & Locomotive Co., Ltd. GDR...... 4
-------
68
-------
INDONESIA (2.9%)
94,000 Astra International.............................. 24
7,000 Bat Indonesia.................................... 33
11,000 Gudang Garam..................................... 17
(a)4,600 Gulf Indonesia Resources Ltd..................... 101
19,400 Indofood Sukses Makmur........................... 6
(a,d)647,000 Makindo.......................................... 115
91,500 Telekomunikasi Indonesia......................... 49
3,000 Unilever Indonesia............................... 16
-------
361
-------
KOREA (2.6%)
1,700 Hansol Paper Co.................................. 7
1,056 Housing & Commercial Bank, Korea GDR............. 6
(a)4,700 Korea Fund, Inc.................................. 31
965 LG Information & Communication Ltd............... 27
(d)1,300 Pohang Iron & Steel Co., Ltd..................... 36
1,000 Pohang Iron & Steel Co., Ltd. ADR................ 18
1,500 Samsung Electronics Co........................... 34
(a,e)11,286 Samsung Electronics Co. GDR...................... 160
20 SK Telecom Co., Ltd.............................. 6
-------
325
-------
MALAYSIA (5.8%)
28,000 Dialog Group Bhd................................. 48
43,000 Genting Bhd...................................... 108
4,000 Kuala Lumpur Kepong Bhd.......................... 9

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
9,000 Malayan Banking Bhd.............................. $ 26
55,000 Telekom Malaysia Bhd............................. 163
162,000 Tenaga Nasional Bhd.............................. 346
33,000 United Engineers (Malaysia) Bhd.................. 27
-------
727
-------
PHILIPPINES (5.6%)
325,625 Ayala Land, Inc., Class B........................ 129
(a)343,600 DMCI Holdings, Inc............................... 10
(a)1,071,000 Digital Telecommunications Philippines, Inc...... 39
(a)177,000 Fil-Estate Land, Inc............................. 5
56,885 Manila Electric Co., Class B..................... 188
(a)484,000 Music Corp....................................... 173
572,760 SM Prime Holdings, Inc........................... 85
62,000 San Miguel Corp., Class B........................ 76
-------
705
-------
SINGAPORE (14.9%)
(a)6,950 Creative Technology Ltd.......................... 153
19,000 Development Bank of Singapore Ltd. (Foreign)..... 163
(a)47,000 NatSteel Electronics Ltd......................... 60
74,560 Oversea-Chinese Banking Corp. (Foreign).......... 435
51,000 Parkway Holdings Ltd............................. 115
20,200 Singapore Press Holdings Ltd. (Foreign).......... 253
77,000 United Overseas Bank Ltd. (Foreign).............. 428
21,000 Venture Manufacturing (Singapore) Ltd............ 59
(a)66,000 Want Want Holdings Ltd........................... 91
94,000 Wing Tai Holdings Ltd............................ 110
-------
1,867
-------
TAIWAN (15.3%)
(a)20,000 Acer, Inc. GDR................................... 142
(a)18,500 Asustek Computer, Inc............................ 293
(a)13,186 Asustek Computer, Inc. GDR....................... 211
12,000 Cathay Construction Corp......................... 14
(a)13,000 China Development Corp........................... 37
(a)84,687 Compal Electronics............................... 246
(a)3,000 Compeq Manufacturing Co., Ltd.................... 17
(a)8,000 Delpha Construction Co., Ltd..................... 12
8,000 Delta Electronics, Inc........................... 32
251,645 Far East Textile Ltd............................. 273
(a)51,000 Hon Hai Precision Industry....................... 258
(a)20,000 Kuoyang Construction............................. 38
(a)13,000 Pou Chen Corp.................................... 53
48,200 Siliconware Precision Industries Co.............. 114
(a)14,000 Siliconware Precision Industries Co. GDR......... 180
-------
1,920
-------
THAILAND (3.4%)
4,000 Advanced Info Service PCL (Foreign).............. 19
(a,d)9,000 Bangkok Expressway PCL (Foreign)................. 5
(d)67,000 CVD Entertainment PCL (Foreign).................. 35
76,300 Eastern Water Resources Development & Management
PCL............................................ 79
(d)6,400 I.C.C. International PCL (Foreign)............... 5
4,000 Industrial Finance Corp. of Thailand (Foreign)... 1
15,000 Land & House PCL (Foreign)....................... 3
(d)6,000 Matichon PCL (Foreign)........................... 6
(d)45,000 Nation Multimedia Group PCL (Foreign)............ 12
</TABLE>

The accompanying notes are an integral part of the financial statements.

4
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

THAILAND (CONT.)
<TABLE>
<C> <S> <C>
(d)152,200 National Petrochemical PCL (Foreign)............. $ 81
5,000 Phatra Thanakit PCL (Foreign).................... 3
(d)133,000 Quality House PCL (Foreign)...................... 6
(a,d)11,000 Sino Thai Engineering & Construction PCL
(Foreign)...................................... 1
82,300 Thai Farmers Bank PCL (Foreign).................. 150
(d)5,000 Thai Rung Union Car PCL (Foreign)................ 1
(d)9,000 Thai Stanley Electric PCL (Foreign).............. 5
(d)11,000 Thai Storage Battery PCL (Foreign)............... 9
(d)12,800 Thai Theparos Food Product PCL (Foreign)......... 12
-------
433
-------
TOTAL COMMON STOCKS (COST $14,461)............................. 11,622
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------

SHORT-TERM INVESTMENT (7.7%)
REPURCHASE AGREEMENT (7.7%)
$968 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $968,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $993 (COST $968)....... 968
-------
FOREIGN CURRENCY (0.1%)
IDR 32,119 Indonesian Rupiah................................ 6
MYR 3 Malaysian Ringgit................................ 1
SGD 17 Singapore Dollar................................. 10
TWD 44 Taiwan Dollar.................................... 1
-------
TOTAL FOREIGN CURRENCY (COST $18).............................. 18
-------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.3%) (COST $15,447)....................... 12,608
-------
OTHER ASSETS (0.4%)
Due from Adviser..................................... $ 31
Dividends Receivable................................. 5
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................... 7
Receivable for Investments Sold...................... 4
Foreign Withholding Tax Reclaim Receivable........... 1 48
-------
LIABILITIES (-0.7%)
Professional Fees Payable............................ (38)
Custodian Fees Payable............................... (15)
Payable for Portfolio Shares Redeemed................ (13)
Bank Overdraft....................................... (7)
Deferred Foreign Taxes Payable....................... (4)
Administrative Fees Payable.......................... (3)
Other Liabilities.................................... (5) (85)
------- -------
NET ASSETS (100%)............................................... $12,571
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,229,785 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $ 5.64
-------
-------

<CAPTION>
AMOUNT
(000)
- --------------------------------------------------------------------------
<S> <C> <C>

NET ASSETS CONSIST OF:
Paid in Capital................................................. $17,788
Undistributed Net Investment Income............................. 73
Accumulated Net Realized Loss................................... (2,454)
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of foreign taxes of $4)..................... (2,836)
-------
NET ASSETS...................................................... $12,571
-------
-------
</TABLE>

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:

- ---------------

- ---------------
At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) DEPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- -------------
<S> <C> <C> <C>
$ 15,855 $ 288 $ (3,553) $ (3,265)
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $27,966,000 and $11,074,000,
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1997.

At December 31, 1997, the Portfolio had available capital loss carryforwards to
offset future net capital gains, to the extent provided by regulations, through
December 31, 2005 of approximately $1,501,000. To the extent that capital loss
carryforwards are used to offset any future net capital gains realized during
the carryforward period as provided by U.S. Federal income tax regulations, no
capital gains tax liability will be incurred by a Portfolio for gains realized
and not distributed. To the extent that capital gains are so offset, such gains
will not be distributed to shareholders.

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1997 to December 31, 1997,
the Portfolio incurred and elected to defer until January 1, 1998, for U.S.
Federal income tax purposes, net capital losses of approximately $529,000.
- ----------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

5
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997

SUMMARY OF COMMON STOCKS BY INDUSTRY CLASSIFICATION
(UNAUDITED)

<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- ------- ---------
<S> <C> <C>
Capital Equipment....................... $ 1,792 14.2%
Consumer Products....................... 1,530 12.2
Energy.................................. 792 6.3
Finance................................. 4,559 36.3
Mines................................... 9 0.1
Materials............................... 152 1.2
Multi-Industry.......................... 795 6.3
Technology.............................. 1,441 11.5
Services................................ 552 4.4
------- ---------
Total Investments....................... $11,622 92.5%
------- ---------
------- ---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S
FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 2.7%
Brazil 14.3%
Chile 0.5%
China 0.2%
Egypt 1.7%
Hong Kong 1.7%
Hungary 0.7%
India 7.5%
Indonesia 1.6%
Israel 2.6%
Korea 2.8%
Malaysia 2.5%
Mexico 11.3%
Pakistan 4.2%
Peru 0.6%
Philippines 1.6%
Poland 1.6%
Russia 6.2%
South Africa 5.0%
Taiwan 3.0%
Thailand 2.2%
Turkey 5.3%
Venezuela 0.4%
Zimbabwe 0.5%
Other 19.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------------------- ------------ ----------
<S> <C> <C>
Telebras Brazil 4.9%
CRT Brazil 2.8%
FEMSA, Class B Mexico 2.8%
Telmex, Class L ADR Mexico 2.6%
Yapi Ve Kredi Bankasi A.S. Turkey 2.0%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS

VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Services $7,443 21.8%
Consumer Products 6,001 17.6%
Finance 4,426 13.0%
Capital Equipment 2,820 8.3%
Energy 2,810 8.2%
</TABLE>

PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------
AVERAGE
ANNUAL
ONE SINCE
YEAR INCEPTION
-------- ------------
<S> <C> <C>
PORTFOLIO(3)............................ 0.52% -1.22%
INDEX................................... -14.42% -12.93%
</TABLE>

1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (includes dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on October 1, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C>
Emerging Markets IFC Global Total Return
Equity Portfolio Composite Index 1
10/1/96* $10,000 $10,000
12/31/96 9,797 9,830
12/31/97 9,848 8,413
*Commencement of operations
</TABLE>

The Emerging Markets Equity Portfolio seeks long-term capital appreciation by
investing primarily in common and preferred stocks, convertible securities,
rights and warrants to purchase common stocks, sponsored or unsponsored ADRs and
other equity securities of emerging market country issuers.
For the year ended December 31, 1997, the Portfolio had a total return of 0.52%
compared to -14.42% for the IFC Global Total Return Composite Index (the
"Index"). For the period from October 1, 1996 (commencement of operations)
through December 31, 1997, the Portfolio had an average annual total return of
- -1.22% compared with -12.93% for the Index. The currency crisis in Asia and the
contagion effect of Asian devaluations triggered a collapse of practically every
emerging market in the fourth quarter of 1997. The selling panic which ensued
across all emerging markets left Asia down 33%, Latin America down 11% and
Russia down 18%. Even India, insulated and isolated, was off 12% during the
quarter. The Portfolio's overweight positions in Russia, Indonesia, Korea and
Thailand had a negative impact on performance over this period.
For the year the Portfolio outperformed the Index. Country allocation drove
performance, as overweights in Russia, India, Pakistan and Turkey, combined with
underweights in Asia in general helped the relative results. We began easing
into Asia in the third and fourth quarters of 1997 as we felt that both the
currency and stock markets had dramatically overshot fair-value benchmarks.
Asian markets are down 70%-85% from their highs and have discounted economic
devastation and corporate bankruptcies. While we do believe that the near-term
economic and earnings outlook for the Asian countries is grim, and that economic
pain with its commensurate political convulsions are

7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

ahead, (particularly in countries like Indonesia and Korea), we believe that the
worst has been discounted in the prices of stocks and the currencies. These
markets have been tremendously oversold, and in the face of such negative
sentiment, any marginally positive news could ignite a huge rally in the region.

We have been discriminating in the selection of both markets and stocks as we
believe that the markets will bifurcate (as in Japan in the last few years). We
envision a distinction between winners and losers as the era of "Asian Value"
crony-capitalism comes to an end. We feel that Korea has the best chance of
transforming its economy and its corporate structure for the benefit of the
shareholder. World class companies such as Samsung Electronics, LG Information &
Communication and Pohang Iron & Steel are at bargain basement levels. We are
overweight Korea and concentrated in these stocks.

The closure of 56 out of 58 finance companies in Thailand last month signaled to
us the start of the corporate restructuring that is inevitable in Thailand.
After an agonizing 6 months it appears that the Thai government and the
corporate sector have seen the writing on the wall as slow, fitful, ambivalent
restructuring has begun. We are overweight Thailand since we feel that, although
positive economic and corporate news will be scarce over the next year, the
market in its discounting wisdom may have seen the worst.

Indonesia has fallen the furthest and the fastest of all Asian markets. Although
this market is currently capitalized at 10% of its value in U.S. dollars from a
year earlier, we hesitate to add to positions. While Indonesia is very cheap, it
is deservedly so. The country is poised on a razor's edge as the fate of a
country of 200 million people depends on the will of one man. The corrupt nexus
between politics and business remains intractable, and it appears that no real
progress on economic reform can be made with the current political regime.
President Suharto has made some concessions and conciliatory noises under duress
from the International Monetary Fund (IMF) and a phone call from President
Clinton. However, a true embracing of the IMF reform package implies a
fundamental reformation of the political system and abdication of economic
largesse by the Suharto family. Resentment for the First Family, particularly
toward the Suharto children, runs deep and may prove incendiary in the coming
months. The scenario developing in Indonesia includes sharply higher inflation,
a recession, a dramatic rise in unemployment, food shortages and an election. We
maintain a neutral weight in Indonesia as the market is dramatically oversold.
Although we expect a significant upward move from these levels, we would expect
to sell into a rally, assuming no change in underlying fundamentals.

Malaysia has earned the dubious distinction of the 'least-worst' Asian market.
Its banking system is sound, politics stable and its corporate sector is in
reasonable shape. Our hesitancy towards Malaysia has been valuation-based. Given
the recent correction, we are in the process of increasing our long underweight
position.

We are slightly underweight Latin America and expect to decrease our exposure
even further. We remain upbeat on the government and corporate leadership
witnessed during the post-Mexico devaluation crisis and the more recent Asian
crisis. In Mexico, the consumer recovery continues and in Brazil the
privatization program is moving ahead. However, the Brazilian real is perhaps
one of the more overvalued currencies in the emerging market universe, and the
high real interest rates required to support it in the aftermath of the Asian
crisis will prove burdensome both for the corporate sector and for equity market
performance. Mexico has performed spectacularly in the past 12 months as it has
enjoyed the unique position of having taken its devaluation "medicine" early as
well as being geographically situated to capitalize on the phenomenal strength
of the U.S. economy. As a result, though, many of the Mexican stocks we own no
longer offer compelling value, and will likely be trimmed to gain exposure to
other investments in Asia.

We continue to view India and South Africa as a source of funds for our
increased exposure in Asia. India is well underpinned by both valuations and
corporate fundamentals; however, we believe that political uncertainty and
slightly higher interest rates will cap some of the upside in the market.

8
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

Russia has had a big correction after a stellar run. We continue to remain
sanguine about its long term prospects but have trimmed our position a bit.
Likewise, Turkey experienced tremendous returns over the last year, and remains
one of the last markets that have yet to conquer inflation. Positive news on
this front could trigger another move up. As valuations remain at attractive
levels, we are overweight the Turkish market. Cash has built up and is slowly
being redeployed as the entire asset class has been joltingly repriced
significantly below fair value.

In closing, we are happy to inform you that we have added Tim Jensen to the
Emerging Market team as a portfolio manager covering the Asian markets. Tim will
be the point person in New York coordinating investments in the Asian markets
for the global emerging market funds. He will work with our Singapore based
team. Tim has eight years of investment experience and was most recently a
partner at Ardsley. Additionally, Vinod Sethi, Managing Director in charge of
our Bombay office, has expanded his responsibilities to include oversight of
stock selection in Asia. He will act as the CIO for the team in Asia and will
maintain his responsibility for stock selection in India. Ean Wah Chin, Managing
Director, is now Chairman of the overall investment management business for Asia
ex-Japan, and will continue to have input to the country allocation process for
the global emerging market product.

January 1998

9
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

COMMON STOCKS (UNLESS OTHERWISE NOTED) (80.6%)
ARGENTINA (2.7%)
1,150 Nortel ADR.................................................. $ 29
1,780 Telecom Argentina ADR....................................... 64
17,495 Telefonica de Argentina ADR................................. 652
4,642 YPF ADR..................................................... 159
-------
904
-------
BRAZIL (14.2%)
13,360,000 Banco Bradesco (Preferred).................................. 132
237,000 Brahma (Preferred).......................................... 159
23,120 Brahma (Preferred) ADR...................................... 328
8,149,000 CELESC (Preferred).......................................... 354
2,000 CEMIG ADR................................................... 87
(a)782,400 CRT (Preferred)............................................. 964
6,500 CVRD (Preferred)............................................ 131
3,023 CVRD ADR.................................................... 60
209,000 Coteminas................................................... 75
(a,e)2,700 Coteminas (Preferred) ADR................................... 45
(a)110,000 Encorpar.................................................... --
299,500 Itaubanco (Preferred)....................................... 161
74,000 Lightpar.................................................... 22
1,159,000 Lojas Arapua (Preferred).................................... 4
1,305 Lojas Arapua (Preferred) ADR................................ 4
749,000 Lojas Renner (Preferred).................................... 24
4,415 Pao de Acucar (Preferred) ADR............................... 86
1,207,000 Petrobras (Preferred)....................................... 282
(a,e)1,555 Petrobras (Preferred) ADR................................... 37
(a,e)1,645 Rossi GDR................................................... 8
1,791,000 Telebras (Preferred)........................................ 204
991,000 Telebras.................................................... 101
11,643 Telebras ADR................................................ 1,356
4,836 TELESP (Preferred).......................................... 1
(a)7,070 Unibanco (Preferred) GDR.................................... 228
-------
4,853
-------
CHILE (0.5%)
2,805 CCU ADR..................................................... 82
1,335 Enersis ADR................................................. 39
3,330 Santa Isabel ADR............................................ 59
-------
180
-------
CHINA (0.2%)
36,000 Qingling Motors Co., Class H................................ 18
(a)129,000 Zhejiang Expressway Co., Ltd., Class H...................... 26
58,000 Zhenhai Refining & Chemical Co., Ltd., Class H.............. 24
-------
68
-------
COLOMBIA (0.0%)
25,520 Banco de Colombia........................................... 9
-------
EGYPT (1.7%)
1,100 Al-Ahram Beverages Co., GDR................................. 31
1,750 Commercial International Bank............................... 35
4,000 Commercial International Bank GDR (Registered).............. 84
3,500 Eastern Tobacco............................................. 81
(a)1,000 Helwan Cement............................................... 20
1,635 Industrial & Engineering.................................... 27
(a)2,300 Madinet Nasr Housing & Development.......................... 149
650 North Cairo Flour Mills Co.................................. 19
600 Paints & Chemical Industry.................................. 19
2,500 Paints & Chemical Industry GDR.............................. 25
3,000 Suez Cement Co. GDR......................................... 61
1,200 Torah Portland Cement....................................... 28
-------
579
-------
HONG KONG (1.7%)
16,000 Cheung Kong Holdings Ltd.................................... 105
19,000 China Light & Power Co., Ltd................................ 106

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
26,000 China Resources Enterprise Ltd.............................. $ 58
4,600 HSBC Holdings plc........................................... 113
65,000 Ng Fung Hong Ltd............................................ 68
13,000 Shanghai Industrial Holdings Ltd............................ 48
14,000 Sun Hung Kai Properties Ltd................................. 98
-------
596
-------
HUNGARY (0.7%)
400 Borsod Chem Rt. GDR (Registered)............................ 14
780 Gedeon Richter Rt........................................... 82
4,250 MOL Magyar Olaj-es Gazipari Rt. GDR (Registered)............ 104
800 OTP Bank Rt................................................. 30
433 Tisza Vegyi Kombinat Rt. GDR (Registered)................... 7
-------
237
-------
INDIA (7.5%)
4,000 Bajaj Auto Ltd.............................................. 62
50,000 Bharat Heavy Electricals.................................... 451
10,000 Container Corp. of India Ltd................................ 107
25,650 Hero Honda Motors Ltd....................................... 604
3,600 Housing Development Finance Corp............................ 283
20,000 ITC Ltd..................................................... 316
(a,g)45,500 Morgan Stanley India Investment Fund, Inc................... 381
21,900 State Bank of India......................................... 136
25,000 Tata Engineering & Locomotive, Class A...................... 208
-------
2,548
-------
INDONESIA (1.6%)
412,200 Astra International (Foreign)............................... 107
(d)373,604 Bank International Indonesia (Foreign)...................... 22
(d)231,000 Bank Negara Indonesia (Foreign)............................. 22
8,200 Barito Pacific Timber....................................... 2
53,645 Bimantra Citra (Foreign).................................... 10
26,000 Citra Marga Nusaphala Persada............................... 3
7,983 Daya Guna Samudera.......................................... 6
70,116 Gudang Garam (Foreign)...................................... 107
(a)400 Gulf Indonesia Resources Ltd................................ 9
(d)21,000 Hanjaya Mandala Sampoerna (Foreign)......................... 16
41,500 Indah Kiat Pulp & Paper Corp................................ 7
(d)99,400 Indah Kiat Pulp & Paper Corp. (Foreign)..................... 18
102,900 Indofood Sukses Makmur (Foreign)............................ 34
3,900 London Sumatra Indonesia.................................... 2
(d)98,000 Mayora Indah (Foreign)...................................... 8
(a,d)154,000 Putra Surya Multidana (Foreign)............................. 15
6,100 Tambang Timah............................................... 7
190,500 Telekomunikasi Indonesia.................................... 101
1,000 Telekomunikasi Indonesia ADR................................ 11
(d)68,000 Telekomunikasi Indonesia (Foreign).......................... 36
-------
543
-------
ISRAEL (2.6%)
89,200 Bank Hapoalim Ltd. (Registered)............................. 214
6,467 Elbit Systems Ltd........................................... 85
286 First International Bank of Israel Ltd., Class 5............ 210
1,240 Koor Industries Ltd......................................... 137
48,950 Supersol Ltd................................................ 139
6,780 Supersol Ltd. ADR........................................... 95
-------
880
-------
KOREA (2.8%)
3,500 Hansol Paper Co., Ltd....................................... 15
7,778 Housing & Commercial Bank, Korea GDR........................ 45
(a)4,229 Housing & Commercial Bank, Korea............................ 28
(a)6,500 Korea Fund, Inc............................................. 43
6,349 LG Information & Communication Ltd.......................... 177
(d)6,900 Pohang Iron & Steel Co., Ltd................................ 192
8,650 Samsung Electronics Co...................................... 196
9,900 Samsung Electronics GDR (New)............................... 141
</TABLE>

The accompanying notes are an integral part of the financial statements.

10
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

KOREA (CONT.)
<TABLE>
<C> <S> <C>
(a,e)3,896 Samsung Electronics GDS (New)............................... $ 55
(d)201 Telecom Co., Ltd............................................ 61
-------
953
-------
MALAYSIA (2.5%)
11,400 AMMB Holdings Bhd........................................... 7
3,000 Berjaya Sports Toto Bhd..................................... 8
15,000 Carlsberg Brewery Malaysia Bhd.............................. 48
24,000 Commerce Asset Holdings Bhd................................. 12
10,000 Genting Bhd................................................. 25
36,000 Golden Hope Plantations Bhd................................. 42
19,000 IOI Corp. Bhd............................................... 6
19,000 Kuala Lumpur Kepong Bhd..................................... 41
24,000 Malayan Banking Bhd......................................... 70
24,000 Malayan United Industries Bhd............................... 4
8,000 Malaysian International Shipping Corp. Bhd (Foreign)........ 12
3,000 Malaysian Pacific Industries Bhd............................ 7
25,000 Magnum Corp. Bhd............................................ 15
8,000 Nestle Bhd.................................................. 37
5,000 New Straits Times Press Bhd................................. 6
9,000 Perusahaan Otomobil Nasional Bhd............................ 9
35,000 Petronas Gas Bhd............................................ 80
42,000 R.J. Reynolds Bhd........................................... 69
38,000 RHB Capital Bhd............................................. 18
9,000 Rashid Hussain Bhd.......................................... 7
8,000 Resorts World Bhd........................................... 13
8,200 Rothmans of Pall Mall Bhd................................... 64
49,000 Sime Darby Bhd.............................................. 47
14,000 Technology Resources Industries Bhd......................... 8
32,000 Telekom Malaysia Bhd........................................ 95
43,000 Tenaga Nasional Bhd......................................... 92
29,000 United Engineers Bhd........................................ 24
-------
866
-------
MEXICO (11.3%)
8,035 Apasco...................................................... 55
46,125 Banacci, Class B............................................ 138
(a,e)370 Bancomer ADR, Class B....................................... 5
(a)142,785 Bancomer, Class B........................................... 93
(a)61,478 Cemex CPO................................................... 278
(a)345 Cemex CPO ADR............................................... 3
4,180 Cifra ADR, Class B.......................................... 10
22,865 Cifra, Class C.............................................. 51
11,003 Cifra, Class V.............................................. 27
116,735 FEMSA, Class B.............................................. 939
(a)7,285 Grupo Televisa GDR.......................................... 282
102,645 Kimberly-Clark Corp., Class A............................... 488
(a)9,495 TV Azteca ADR............................................... 214
9,843 Televisa CPO GDR............................................ 381
15,776 Telmex, Class L ADR......................................... 885
-------
3,849
-------
PAKISTAN (4.2%)
136,000 Fauji Fertilizer Co., Ltd................................... 260
(a)242,700 Hub Power Co................................................ 316
29,628 Pakistan State Oil Co., Ltd................................. 252
703,300 Pakistan Telecommunications Corp., Class A.................. 531
(a)90,900 Sui Northern Gas Pipelines, Ltd............................. 56
-------
1,415
-------
PERU (0.6%)
7,970 Tel Peru ADR................................................ 186
-------
PHILIPPINES (1.6%)
277,600 Ayala Corp.................................................. 108
32,480 Ayala Land, Inc., Class B................................... 13
54,420 C&P Homes, Inc.............................................. 3
(a)44,280 Filinvest Land, Inc......................................... 2
26,540 Manila Electric Co., Class B................................ 88
28,960 Metro Pacific Corp.......................................... 1
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
2,782 Metropolitan Bank & Trust Co................................ $ 19
8,420 Philippine Long Distance Telephone Co....................... 183
500 Philippine Long Distance Telephone Co., ADR................. 11
(a)1,370 Philippine National Bank.................................... 3
39,750 Petron Corp................................................. 3
298,510 SM Prime Holdings, Inc...................................... 44
45,680 San Miguel Corp., Class B................................... 56
-------
534
-------
POLAND (1.6%)
(a)6,767 Agros Holding, Class C...................................... 140
48,973 BIG Bank Inicjatyw.......................................... 48
2,000 BIG Bank Inicjatyw GDR...................................... 31
(a)800 Bank of Handlowy W Warszawie................................ 10
1,000 BRE Bank.................................................... 21
450 Bank Slaski................................................. 25
(a)2,004 Cieszyn Polifarb Wroclaw.................................... 9
3,050 Debica...................................................... 74
12,900 Elektrim.................................................... 125
(a)3,500 Exbud....................................................... 33
(a)8,400 Polifarb Wroclaw............................................ 40
-------
556
-------
RUSSIA (6.2%)
150,000 Irkutskenergo............................................... 30
4,740 Lukoil Holding ADR.......................................... 437
(d)554,047 Mustcom..................................................... 471
4,033 Mosenergo ADR............................................... 151
(a)24,400 Rostelecom.................................................. 87
(d)325,393 Svyaz Finance............................................... 283
14,700 Surgutneftegaz ADR.......................................... 150
983 Tatneft ADR................................................. 140
756,139 Unified Energy Systems...................................... 227
(a)4,966 Unified Energy Systems GDR.................................. 139
-------
2,115
-------
SINGAPORE (0.0%)
(a)200 Creative Technology Ltd..................................... 4
-------
SOUTH AFRICA (5.0%)
12,500 Barlow Rand Ltd............................................. 106
3,824 Bidvest Group Ltd........................................... 32
1,100 Coronation Holdings Ltd..................................... 17
900 Coronation Holdings Ltd. (New).............................. 13
18,600 Ellerine Holdings Ltd....................................... 120
12,400 Foodcorp Ltd................................................ 64
16,900 Forbes Group Ltd............................................ 31
20,400 Illovo Sugar Ltd............................................ 35
27,750 Malbak Ltd.................................................. 27
58,700 NBS Boland Group Ltd........................................ 145
(a)117,100 New Africa Investments Ltd., Class N........................ 112
20,000 Orion Selections Holdings Ltd............................... 43
9,960 Persetel Holdings Ltd....................................... 55
83,900 Protea Furnishers Ltd....................................... 42
46,400 Rembrandt Group Ltd......................................... 338
(a)29,400 Samgro Investment Holdings Ltd. (New)....................... 75
44,400 Sasol Ltd................................................... 464
-------
1,719
-------
TAIWAN (3.0%)
(a)29,500 Asustek Computer, Inc....................................... 468
62,000 Cathay Construction Corp.................................... 71
(a)33,125 Compal Electronics.......................................... 96
116,346 Far East Textile Ltd........................................ 126
(a)29,000 Hon Hai Precision Industry.................................. 147
52,640 Siliconware Precision Industries Co......................... 124
-------
1,032
-------
THAILAND (2.2%)
(a)6,200 Advance Agro PCL (Foreign).................................. 5
12,800 Advanced Info Service PCL (Foreign)......................... 62
</TABLE>

The accompanying notes are an integral part of the financial statements.

11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

RIGHTS (0.1%)
BRAZIL (0.1%)
(a,d)571,209 Banco Bradesco (Preferred).................................. 1
(a)10,817 CRT RFD..................................................... 13
(a)162 TELESP (Preferred).......................................... --
-------
14
-------

<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------

POLAND (0.0%)
(a,d)607 Polifarb-Cieszyn Wroclaw.................................... $ 1
-------
SOUTH AFRICA (0.0%)
(a)225 Coronation Holdings, Ltd.................................... --
-------
THAILAND (0.0%)
(a)28,000 National Finance & Securities PCL (Foreign)................. --
-------
TOTAL RIGHTS (COST $0)........................................................ 15
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------

WARRANTS (0.0%)
INDONESIA (0.0%)
(a,d)7,112 Bank International Indonesia, expiring 1/17/00.............. --
(a,d)10,240 Indah Kiat Pulp & Paper Corp. (Foreign) expiring 7/11/02.... --
-------
--
-------
MALAYSIA (0.0%)
(a)2,250 Commerce Asset Holdings Bhd, expiring 3/16/02............... --
(a)571 Rashid Hussain Bhd, expiring 3/25/02........................ --
-------
--
-------
TOTAL WARRANTS (COST $15)..................................................... --
-------
TOTAL FOREIGN SECURITIES (80.7%) (COST $31,115)............................... 27,502
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------

SHORT-TERM INVESTMENT (19.6%)
REPURCHASE AGREEMENT (19.6%)
$6,691 Chase Securites, Inc. 5.95%, dated 12/31/97, due 1/2/98, to
be repurchased at $6,693, collateralized by U.S. Treasury
Notes, 5.875%, due 11/15/05, valued at $6,831 (COST
$6,691)................................................... 6,691
-------
FOREIGN CURRENCY (5.0%)
BRL 5 Brazilian Real.............................................. 5
COP 1,364 Colombian Peso.............................................. 1
EGP 26 Egyptian Pound.............................................. 8
HKD 1,048 Hong Kong Dollar............................................ 135
HUF 4,808 Hungarian Forint............................................ 23
INR 10,507 Indian Rupee................................................ 268
IDR 173,929 Indonesian Rupiah........................................... 32
MYR 32 Malaysian Ringgit........................................... 8
MXP 100 Mexican Peso................................................ 12
PKR 24 Pakistani Rupee............................................. 1
PLN 49 Polish Zloty................................................ 14
ZAR 79 South African Rand.......................................... 16
KRW 71,355 South Korean Won............................................ 42
TWD 37,237 Taiwan Dollar............................................... 1,141
TRL 165,810 Turkish Lira................................................ 1
VEB 39 Venezuelan Bolivar.......................................... --
-------
TOTAL FOREIGN CURRENCY (COST $1,825).......................................... 1,707
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.

12
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
(000)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (105.3%) (COST $39,631)..................................... $35,900
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (3.1%)
Deferred Organization Costs......................................... $ 385
Receivable for Investments Sold..................................... 247
Due from Adviser.................................................... 136
Receivable for Portfolio Shares Sold................................ 219
Dividends Receivable................................................ 47
Interest Receivable................................................. 14
Other............................................................... 6 1,054
----------
LIABILITIES (-8.4%)
Bank Overdraft...................................................... $ (1,976)
Payable for Investments Purchased................................... (636)
Unrealized Loss on Swap Agreements.................................. (102)
Professional Fees Payable........................................... (63)
Custodian Fees Payable.............................................. (41)
Payable for Portfolio Shares Redeemed............................... (12)
Administrative Fees Payable......................................... (7)
Payable for Stamp Duty Tax.......................................... (5)
Payable for Foreign Taxes........................................... (3)
Unrealized Loss on Foreign Currency Exchange Contracts.............. (1)
Other Liabilities................................................... (10) (2,856)
---------- ----------
NET ASSETS (100%).................................................................. $ 34,098
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,610,013 outstanding $0.001 par value shares (authorized 500,000,000
shares).......................................................................... $ 9.45
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital.................................................................... $ 38,845
Undistributed Net Investment Income................................................ 14
Accumulated Net Realized Loss...................................................... (925)
Unrealized Depreciation on Investments, Foreign Currency Translations and Swaps
(Net of foreign taxes of $3)..................................................... (3,836)
----------
NET ASSETS......................................................................... $ 34,098
----------
----------
</TABLE>

- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- ----- ----------- ------------ ----- -------------
<S> <C> <C> <C> <C> <C>
HKD 1,048 $ 135 1/2/98 U.S.$ 135 $ 135 $ --
IDR164,326 30 1/2/98 U.S.$ 29 29 (1)
MYR 36 9 1/2/98 U.S.$ 9 9 --
----- ----- -----
$ 174 $ 173 $ (1)
----- ----- -----
----- ----- -----
</TABLE>

SWAP AGREEMENT:

The Portfolio had the following Total Return Swap Agreement open at December 31,
1997:

<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
- ----------- ------------------------------------------- ---------------
<S> <C> <C>
$ 350 Agreement with Goldman Sachs International $ (102)
terminating November 3, 1998 to pay 12
month USD-LIBOR minus 4.00% and to receive
the return of the SET Index converted into
U.S. Dollars at the mid-market rate on
October 30, 1998
</TABLE>

- ---------------

(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
LIBOR -- London Interbank Offer Rate
PCL -- Public Company Limited
RFD -- Ranked for Dividends
USD -- U.S. Dollar

- ---------------

At December 31, 1997 cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 38,184 $ 1,747 $ (5,738) $ (3,991)
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $36,525,000 and $16,044,000,
respectively. There were no purchases and sales of long-term U.S. Government
securities for the year ended December 31, 1997.

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1997 to December 31, 1997,
the Portfolio incurred and elected to defer until January 1, 1998, for U.S.
Federal income tax purposes, net capital losses of approximately $547,000.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)

<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- --------- ---------
<S> <C> <C>
Capital Equipment....................... $ 2,820 8.3%
Consumer Products....................... 6,001 17.6
Energy.................................. 2,810 8.2
Finance................................. 4,426 13.0
Materials............................... 2,197 6.4
Multi-Industry.......................... 1,805 5.3
Services................................ 7,443 21.8
--------- ---
Total Investments....................... $ 27,502 80.6%
--------- ---
--------- ---
</TABLE>

The accompanying notes are an integral part of the financial statements.

13
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIOS FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 0.6%
Belgium 0.6%
Canada 2.0%
Finland 0.5%
France 3.5%
Germany 5.2%
Hong Kong 0.9%
Ireland 2.8%
Italy 1.2%
Japan 7.0%
Netherlands 2.5%
New Zealand 1.0%
Portugal 0.5%
Spain 1.3%
Sweden 1.3%
Switzerland 5.0%
United Kingdom 15.7%
United States 48.2%
Other 0.2%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------------------- -------------- ----------
<S> <C> <C>
Philip Morris Cos., Inc. United States 2.5%
GenRad, Inc. United States 2.2%
Reckitt & Colman plc United Kingdom 2.0%
Pharmacia & Upjohn, Inc. United States 1.8%
Borg-Warner Automotive, Inc. United States 1.7%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS

VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Consumer Products $3,278 22.3%
Capital Equipment 3,245 22.0%
Finance 2,206 15.0%
Services 2,119 14.4%
Materials 1,236 8.4%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
---------------
<S> <C>
PORTFOLIO(3).................. 20.04%
INDEX......................... 16.66%
</TABLE>

1. The MSCI World Index is an unmanaged index of common stocks and includes
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region (includes
dividends).
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C>
Global Equity MSCI World
Portfolio Index 1
1/2/97* $10,000 $10,000
12/31/97 12,004 11,666
*Commencement of operations
</TABLE>

The Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing primarily in equity securities using an
approach that is oriented to the selection of individual stocks that Morgan
Stanley Asset Management believes are undervalued.

The approach in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of global databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Stocks selected
from this screening process are put through detailed fundamental analysis.
Important areas covered during this in-depth study include the companies'
balance sheet and cash flow, franchise, products, management and the strategic
value of the companies' assets.

For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 20.04% as compared to
16.66% for the Morgan Stanley Capital International (MSCI) World Index (the
"Index").

Outperformance during 1997 came largely from the combination of our heavily
underweight position in Japan and Southeast Asia and strong Japanese stock
selection, notably the large

14
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

exporters which continued to benefit from yen weakness. Stock selection in many
European markets, particularly financials, also contributed, as did our
overweighting in continental Europe.

After beginning 1997 as perceivably one of the most "at risk" markets on a
valuation basis, the U.S. ended the year again among the strongest developed
markets, despite high volatility. As the economic expansion continued into its
seventh year, the "Goldilocks" investment scenario prevailed: a firming dollar,
robust growth, benign inflation (despite full employment), shrinking supply in
both debt and equities and booming demand (another U.S. $250 billion of net
equity mutual fund inflows). This was despite a 1/4% rise in the Federal Funds
Rate in February (first in over two years) and warnings from the Federal Reserve
Chairman of "irrational exuberance". In Europe, weaker currencies, lower yields,
accelerating restructuring and consolidation drove exceptional local currency
returns. While restructuring remained a central investment theme throughout 1997
it was hampered by double digit unemployment, difficult labor laws and the
election, across the region, of socialist governments. EMU driven interest rate
convergence was a feature with increasing confidence that Italy would join in
the first wave. The U.K. lagged its continental counterparts as the newly
independent Bank of England hiked interest rates 1 1/4% in an attempt to subdue
the overheated domestic economy.

In Japan, a weak domestic economy following April's VAT hike, the spectre of
deregulation and the deepening banking crisis, brought a further loss of
confidence. Some hope was extended by year end tax cuts, and increasing
government willingness to restructure its banking system. Changing sentiment was
also evident in the collapse of Yamaichi, Japan's 4th largest broker, perhaps
heralding a breakdown in the traditional keiretsu "convoy" system. Significant
risks remain, however, not least the threat to corporate earnings posed by Asian
devaluations and the inevitable corporate collapses, to which Japan Inc. is the
major creditor. Southeast Asia's problems have been widely documented, with much
of the region's growth based on hard currency financing which has become
exorbitantly expensive. Despite the IMF "bail out" of Korea, Indonesia and
Thailand, the austerity programs, recessions and necessary reforms in these
economies have barely begun and the political willingness to achieve this not
yet demonstrated.

Given a projected slowdown in global growth, the U.S. Treasury market is now
predicting the Federal Reserve Board will ease rates. If mid single digit
earnings growth can be maintained, and inflation remains quiescent, the U.S.
market is arguably fairly valued with long bond yields at current levels. While
equity mutual fund inflows should slow, merger activity is expected to continue.
We remain slightly underweight in the U.S., finding better relative value in
Europe, particularly Ireland and the U.K.. We have moved from market to over
weight in the U.K. recently having found several strong business franchises with
management dedicated to maximizing shareholder value. Despite continued
underperformance, we still struggle to find value in Japan, other than in
selected sectors such as pharmaceuticals. Hence we expect to remain underweight
in the foreseeable future. We also remain cautious about Asia as a whole despite
the exceptionally steep sell off.

Additions to the Portfolio in the past six months included:
Quarter Three:

LION NATHAN (New Zealand) is the dominant name, along with Fosters, in the
Australasian brewing market. The stock is currently undervalued due to concern
over recent market share losses and management turnover.

The Portuguese cement company, CIMPOR, is benefiting from growth in its core
domestic market. With its strong balance sheet it is well positioned to exploit
opportunities in emerging markets such as Brazil.

GENERAL SIGNAL (USA) is a leading manufacturer of process and electronic control
equipment. New management (ex General Electric) has focused the company on cash
flow generation. Underperforming businesses are being sold. A stock buy back may
be forthcoming in the near term.

15
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

B F GOODRICH (USA) has transformed from a commodity manufacturer into an
aerospace and specialty chemical company. Asset sales have left BFG in a strong
financial position. Jet production is strong; OE sales, spares and overhaul
provide some protection from production slowdown.

NOBLE DRILLING (USA) is a leading operator of jackup rigs for the oil and gas
industry, with growing deep water focus and strong earnings growth prospects
over the next 3-4 years. Conservative management and a favorable industry
outlook provide further comfort in a highly cyclical industry.

TENNECO (USA), after five years of restructuring is a leading global
consolidator in automotive equipment and packaging. The company plans to exit
the unprofitable commodities businesses and use the proceeds to make further
specialty acquisitions, pay down debt and buy back stock.

UNITED MERIDIAN (USA) is a mid-cap gas weighted U.S. E&P company which has grown
production and cash flow by 30% per annum over the past four years. Despite
strong management and locked in production gains over the next 2-3 years, UM
trades at an unjustified discount to its peers.

Following the sale of Camas (building materials) ENGLISH CHINA CLAYS (U.K.) has
refocused on core areas: producing kaolin and calcium carbonates for the paper
industry, and the supply of specialty chemicals for water treatment. ECC will
benefit from the worldwide recovery in the paper industry.

ROYAL SUN ALLIANCE (U.K.) is a global insurer writing most classes of insurance,
created in 1996 from the merger of Royal Insurance Holdings and Sun Alliance.
The company's U.S. operations are improving under better management and
proactive resolution of major U.S. pollution liabilities.

Quarter Four

BANK OF IRELAND provides a wide range of banking and financial services. It has
offices throughout Ireland, the U.K. and Europe and has a subsidiary bank in New
Hampshire. BoI remains cheap, relative to its European and U.K. peers, whilst
offering an attractive yield.

BENCKISER focuses on household cleaning products with leading niche positions in
dish washing products, laundry products and home cleaners. Strong management
have steadily grown Benckiser's market shares, together with strong growth in
its niche categories.

FRANCE TELECOM is the last major European telco to be privatized. FT benefits
from a stable, transparent regulatory environment. FT is rebalancing its tariff
structure, the best defence against looming competition.

FUJISAWA, a medium sized Japanese pharmaceutical company, has moderate growth
prospects and a difficult domestic environment. Its value attractions are its
free cash generation and strong financials. We believe its latent value will be
realized when inevitable industry rationalization takes place.

POTASH CORP OF SASKATCHEWAN (Canada) is the world's lowest cost, highest
reserved producer of potash and is one of the most efficient producers of
phosphate and nitrogen, the other key fertilizer applications. Potash is
renowned for its supply management and generates substantial free cash flow.

Rescued by the Swedish government during the Scandinavian banking crisis,
NORDBANKEN has arguably the best asset quality of the Swedish banks. The 1997
merger with Finland's largest bank, Merita, gives it a unique retail network in
the Nordic region.

NCR CORP (USA) has leading global market shares in its core automated teller
machine and retail scanning products, and should benefit from its independence
after several years of AT&T ownership.

P&O STEAM NAVIGATION (U.K.) includes the P&O and Princess brands. Management
have recently taken radical action to improve return on capital through joint
ventures and are investing cash flow in the higher yielding P&O Cruise business.

16
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

PREMIER FARNELL (U.K.), the world's largest catalogue distributor of
electronic/industrial components, provides engineers needing guaranteed
availability and delivery, giving PF pricing power. Price weakness followed the
acquisition of its large U.S. competitor. PF is well placed for global
expansion.

Stock sales during the second half of the year included:
Quarter Three:

MANNESMANN (Germany) was eliminated on strength.
VARTA (Germany) was sold as better value found elsewhere.
OLIVETTI (Italy) was sold due to operating environment fears.
AMR (USA) was sold on strength after our price target had been reached.
TANDY (USA) was sold on strength after our price target had been reached.
SCOTTISH Hydro-Electric (U.K.) was eliminated on strength.

Quarter Four:

BANQUE NATIONALE DE PARIS (France) successfully reached our target price.
GREENFIELD INDUSTRIES (USA) sold to takeover offer from Kennemetal.
GREENPOINT FINANCIAL CORP (USA) successfully reached our price target.
MCI COMMUNICATIONS CORP (USA) subject to successive takeover bids; we took
advantage of Worldcom's offer.

January 1998

17
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

COMMON STOCKS (89.6%)
AUSTRALIA (0.6%)
14,300 CSR Ltd.......................................... $ 48
(a)18,700 Telstra Corp., Ltd. (Installment Receipts --
Final Installment: AUD 1.35/Share due
11/17/98)...................................... 40
-------
88
-------
BELGIUM (0.6%)
1,220 Delhaize-Le Lion................................. 62
600 G.I.B. Holdings Ltd.............................. 29
-------
91
-------
CANADA (2.0%)
2,250 Potash Corp. of Saskatchewan, Inc................ 187
5,000 Telus Corp....................................... 111
-------
298
-------
FINLAND (0.5%)
5,000 Valmet Oyj....................................... 69
-------
FRANCE (3.5%)
240 Bongrain......................................... 101
(a)3,300 France Telecom................................... 120
550 Groupe Danone.................................... 98
2,500 Scor............................................. 120
(a)1,170 SGS-Thomson Microelectronics N.V................. 72
-------
511
-------
GERMANY (5.2%)
5,050 BASF AG.......................................... 180
4,900 Bayer AG......................................... 182
100 Karstadt AG...................................... 35
2,370 VEBA AG.......................................... 161
158 Viag AG.......................................... 86
225 Volkswagen AG.................................... 126
-------
770
-------
HONG KONG (0.9%)
18,000 Hysan Development Co., Ltd....................... 36
34,000 Jardine Strategic Holdings, Inc.................. 90
-------
126
-------
IRELAND (2.1%)
25,714 Green Property plc............................... 146
27,493 Irish Life plc................................... 158
-------
304
-------
ITALY (1.2%)
36,300 Mediaset S.p.A................................... 178
-------
JAPAN (7.0%)
4,000 Fuji Photo Film Ltd.............................. 153
12,000 Fujisawa Pharmaceutical Co., Ltd................. 105
5,000 Hitachi Ltd...................................... 36
12 Japan Tobacco, Inc............................... 85
5,000 Kao Corp......................................... 72
5,000 Matsushita Electric Industrial Co., Ltd.......... 73
44,000 NKK Corp......................................... 35
8 Nippon Telegraph & Telephone Corp................ 69
23,000 Shionogi & Co., Ltd.............................. 105

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
12,000 Sumitomo Marine & Fire Insurance Co.............. $ 63
2,000 TDK Corp......................................... 151
6,000 Toyo Seikan Kaisha Ltd........................... 86
-------
1,033
-------
NETHERLANDS (2.5%)
500 Akzo Nobel N.V................................... 86
(a)3,100 Benckiser N.V., Class B.......................... 128
2,131 ING Groep N.V.................................... 90
1,100 Philips Electronics N.V.......................... 66
-------
370
-------
NEW ZEALAND (1.0%)
66,400 Lion Nathan Ltd.................................. 149
-------
PORTUGAL (0.5%)
2,900 Cimpor-Cementos de Portugal...................... 76
-------
SPAIN (1.3%)
14,700 Iberdrola........................................ 193
-------
SWEDEN (1.3%)
(a)34,300 Nordbanken AB.................................... 194
-------
SWITZERLAND (5.0%)
50 ABB AG (Bearer).................................. 63
(a)65 Ascom Holdings AG (Bearer)....................... 83
420 Forbo Holding AG (Registered).................... 172
248 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 202
140 Nestle (Registered).............................. 210
8 Sulzer AG (Registered)........................... 5
-------
735
-------
UNITED KINGDOM (15.7%)
(a)9,155 Aggreko plc...................................... 23
6,011 B.A.T. Industries plc............................ 55
7,400 Bank of Ireland.................................. 114
12,100 Bass plc......................................... 188
3,850 Burmah Castrol plc............................... 67
9,155 Christian Salvesen plc........................... 15
8,600 Danka Business Systems plc ADR................... 137
5,700 Diageo plc....................................... 52
28,600 English China Clays plc.......................... 126
20,100 Imperial Tobacco Group plc....................... 127
60,000 Matthews (Bernard) plc........................... 97
18,171 Peninsular & Oriental Steam Navigation Co........ 207
19,400 Premier Farnell plc.............................. 140
15,950 Racal Electronic plc............................. 70
18,500 Reckitt & Colman plc............................. 290
7,000 Rolls-Royce plc.................................. 27
12,533 Royal & Sun Alliance Insurance Group plc......... 126
10,500 Tate & Lyle plc.................................. 86
16,800 Unilever plc..................................... 144
47,000 WPP Group plc.................................... 209
-------
2,300
-------
UNITED STATES (38.7%)
2,000 AT&T Corp........................................ 123
4,450 Albertson's, Inc................................. 211
2,505 Aluminum Company of America...................... 176
</TABLE>

The accompanying notes are an integral part of the financial statements.

18
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
6,600 Amercian Stores Co............................... $ 136
(a)2,004 Ascent Entertainment Group, Inc.................. 20
5,365 B.F. Goodrich Co................................. 222
(a)3,800 BJ's Wholesale Club, Inc......................... 119
1,600 BankBoston Corp.................................. 150
7,100 Boise Cascade Corp............................... 215
4,670 Borg-Warner Automotive, Inc...................... 243
1,404 Browning-Ferris Industries, Inc.................. 52
1,300 Chase Manhattan Corp............................. 142
6,750 Comsat Corp...................................... 164
(a)11,900 Data General Corp................................ 207
(a)14,200 Egghead, Inc..................................... 91
3,200 Enhance Financial Services Group, Inc............ 190
2,350 Finova Group, Inc................................ 117
(a)10,900 GenRad, Inc...................................... 329
2,800 General Signal Corp.............................. 118
1,550 Georgia Pacific Corp............................. 94
(a)1,550 Georgia Pacific Corp. (Timber Group)............. 35
(a)3,800 Homebase, Inc.................................... 30
5,400 Houghton Mifflin Co.............................. 208
3,330 IBP, Inc......................................... 70
(a)14,600 InteliData Technologies Corp..................... 27
1,900 MBIA, Inc........................................ 127
1,400 Mellon Bank Corp................................. 85
(a)4,850 NCR Corp......................................... 135
(a)1,900 Noble Drilling Corp.............................. 58
4,910 Penncorp Financial Group, Inc.................... 175
350 Pennzoil Co...................................... 23
7,300 Pharmacia & Upjohn, Inc.......................... 267
8,200 Philip Morris Cos., Inc.......................... 372
600 Polaroid Corp.................................... 29
2,740 Tecumseh Products Co., Class A................... 134
4,450 Tenneco, Inc..................................... 176
2,450 Terra Nova (Bermuda) Holdings Ltd., Class A...... 64
(a)950 Toys 'R' Us, Inc................................. 30
7,600 Tupperware Corp.................................. 212
3,900 UST Corp......................................... 108
4,600 United Dominion Industries Ltd................... 116
(a)3,150 United Meridian Corp............................. 90
-------
5,690
-------
TOTAL COMMON STOCKS (COST $12,351).............................. 13,175
-------

NO. OF
UNITS
- ------------
UNITS (0.7%)
IRELAND (0.7%)
13,500 Clondalkin Group plc (COST $112)................. 109
-------
TOTAL FOREIGN & U.S. SECURITIES (90.3%) (COST $12,463).......... 13,284
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------

SHORT-TERM INVESTMENTS (17.0%)
U.S. TREASURY BILL (9.5%)
$1,400 U.S. Treasury Bill 0.00%, 1/2/98................. $ 1,400
-------
REPURCHASE AGREEMENT (7.5%)
1,105 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $1,105,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $1,129................. 1,105
-------
TOTAL SHORT-TERM INVESTMENTS (COST $2,505)...................... 2,505
-------
FOREIGN CURRENCY (0.6%)
AUD 1 Australian Dollar................................ --
FRF 241 French Franc..................................... 40
IEP 20 Irish Punt....................................... 29
JPY 1 Japanese Yen..................................... --
NZD 3 New Zealand Dollar............................... 2
SGD 4 Singapore Dollar................................. 2
ESP 1,986 Spanish Peseta................................... 13
-------
TOTAL FOREIGN CURRENCY (COST $86)............................... 86
-------
TOTAL INVESTMENTS (107.9%) (COST $15,054)....................... 15,875
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Receivable for Portfolio Shares Sold...........
$ 124
Dividends Receivable...........................
25
Due from Adviser...............................
13
Foreign Withholding Tax Reclaim Receivable.....
5
Net Unrealized Gain on Foreign Currency
Exchange Contracts............................
5 172
--------
LIABILITIES (-9.1%)
Payable for Investments Purchased..............
(1,294)
Professional Fees Payable......................
(35)
Custodian Fees Payable.........................
(5)
Administrative Fees Payable....................
(3)
Other Liabilities..............................
(3) (1,340)
-------- --------
NET ASSETS (100%).......................................... $14,707
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,252,376 outstanding $0.001 par value shares
(authorized 500,000,000 shares).......................... $ 11.74
--------
--------

NET ASSETS CONSIST OF:
Paid in Capital............................................ $13,746
Overdistributed Net Investment Income...................... (2)
Accumulated Net Realized Gain.............................. 129
Unrealized Appreciation on Investments and Foreign Currency
Translations............................................. 834
--------
NET ASSETS................................................. $14,707
--------
--------
</TABLE>

The accompanying notes are an integral part of the financial statements.

19
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997

- ----------------------------------------------------------------

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- ----- ----------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
GBP 406 $ 657 12/16/98 U.S.$ 663 U.S.$ 663 $ 6
U.S.$ 23 23 1/5/98 ITL 40,514 23 --
U.S.$ 156 156 1/5/98 GBP 95 155 (1)
--
----- ---------
$ 836 $841 $ 5
--
--
----- ---------
----- ---------
</TABLE>

- ---------------

(a) -- Non-income producing security
GBP -- British Pound
ITL -- Italian Lira

- ---------------

At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Global Equity Portfolio
were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 14,969 $ 1,284 $ (464) $ 820
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $13,465,000 and 1,336,000
respectively. There were no purchases and sales of long-term U.S. Government
securities during the year ended December 31, 1997.

----------------------------------------------------------------

SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE % OF
SECTOR DIVERSIFICATION (000) NET ASSETS
- ------------------------------------------- --------- -------------
<S> <C> <C>
Capital Equipment.......................... $ 3,245 22.0%
Consumer Products.......................... 3,278 22.3
Energy..................................... 364 2.5
Finance.................................... 2,206 15.0
Mining..................................... 281 1.9
Materials.................................. 1,236 8.4
Multi-Industry............................. 555 3.8
Services................................... 2,119 14.4
Other...................................... 2,591 17.6
--------- -----
Total Investments.......................... $ 13,284 90.3%
--------- -----
--------- -----
</TABLE>

The accompanying notes are an integral part of the financial statements.

20
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Australia 1.7%
Austria 0.5%
Belgium 0.6%
Denmark 1.5%
Finland 2.2%
France 8.3%
Germany 8.4%
Hong Kong 1.4%
Italy 3.9%
Japan 16.4%
Malaysia 0.2%
Netherlands 6.1%
Norway 0.8%
Singapore 0.9%
Spain 4.0%
Sweden 4.9%
Switzerland 7.4%
United Kingdom 18.5%
Other 12.3%
</TABLE>

PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
--------------
<S> <C>
PORTFOLIO(3).................. 7.31%
INDEX......................... 2.80%
</TABLE>

1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------- ----------- -------------
<S> <C> <C>
Telecom Italia S.p.A. Di Risp Italy 1.7%
Iberdrola Spain 1.4%
Nestle Switzerland 1.4%
Akzo Nobel N.V. Netherlands 1.3%
Nordbanken Holding AB Sweden 1.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment $ 4,300 22.8%
Consumer Products 3,459 18.3%
Finance 2,605 13.8%
Materials 2,444 13.0%
Services 2,372 12.6%
</TABLE>

COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
INTERNATIONAL MSCI EAFE
MAGNUM PORTFOLIO INDEX 1
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 10,731 10,280
*Commencement of operations
</TABLE>

The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by Morgan Stanley Asset Management. The
EAFE countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International (MSCI) EAFE Index, which includes
Australia, Japan, New Zealand, most nations located in Western Europe, and
certain developed countries in Asia.

For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 7.31% as compared to
2.80% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index").

The fourth quarter of 1997 saw most international markets registering losses in
U.S. dollar terms as the turmoil in Asia continued to rattle investors around
the globe. While the contagion continued to have its greatest impact on the
nations in the Pacific Rim, investors in the more distant markets such as the
U.S. and Europe began to consider the effects of cheap Asian exports, slower
global growth and lower Asian demand on corporate earnings.

The Asian currency crisis began mid-year with the devaluation of the Thai baht
on July 2, and quickly spread throughout the region. The countries that have
succumbed to the Asian crisis,

21
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

including Thailand, Malaysia, the Philippines, Indonesia and South Korea, share
common traits: their companies have largely financed themselves with readily
available bank credit, and have used much of this money in unproductive ways
that have earned a less than economic return on investment. Much of this debt
was borrowed in U.S. dollars to take advantage of lower U.S. interest rates, and
as these countries' currencies have devalued, corporate debt obligations have
ballooned, pushing many firms toward bankruptcy. Because loans were often
granted based on relationships and cronyism rather than sound credit analysis,
banks within these countries have also suffered, leading to a banking crisis as
well. Although the International Monetary Fund (IMF) has stepped in to help
shore up the financial system and stabilize the currencies in the region, a lack
of political will to implement the IMF's austere policies in several countries
has left the region vulnerable and sent investors fleeing, at least until there
are signs of real progress.

Virtually no country in the region has escaped the debacle. Although the Hong
Kong dollar's peg to the U.S. dollar has stubbornly held to-date despite
speculators' attacks, it has come at a high cost to the Hong Kong economy. In
order to defend its currency, the Hong Kong Monetary Authority was forced in
October to raise interest rates to painfully high levels, thereby putting
pressure on the interest sensitive stocks (e.g., real estate and banks) that
comprise the bulk of the Hong Kong market. As a result, the Hong Kong market
fell nearly 29% for the quarter. Even markets with relatively healthy
fundamentals were not spared; for the quarter, the supposed "safe haven"
Singapore market fell 20.6% in U.S. dollar terms (-10.0% local currency) while
Australia declined 12.9% (-3.2% local).

The Japanese market also experienced a difficult fourth quarter as the MSCI
Japan index fell 19.8% in U.S. dollar terms and 13.6% in local currency terms.
December was the Japanese market's sixth consecutive month in the red. Business,
consumer and investor confidence has plummeted, contributing to the market's
downward spiral. Sentiment worsened as a string of high-profile bankruptcies in
the financial sector including Sanyo Securities, Hokkaido-Takushoku Bank and
Yamaichi Securities, one of Japan's "big four" brokerage houses, caught the
market and the Japanese government by surprise. The bankruptcies were caused in
part by a credit crunch ahead of stricter capital requirements for Japanese
banks beginning in 1999 (delayed from 1998). Small and mid-size companies are
being especially hard hit by the banks' reticence to lend. The market was also
clearly disappointed by the Japanese government's inaction; the government thus
far has failed to announce a meaningful plan to shore up the financial sector or
pass a fiscal stimulus package able to jump start the economy. And if domestic
problems were not enough, the uncertainty in Asia and in particular in Korea,
one of Japan's major competitors, helped propel Japan's equity markets by
year-end to lows set in 1995.

Relatively speaking, the brightest spot for the fourth quarter was Europe, which
registered a mere 0.1% gain in U.S. dollars and 0.7% in local currencies for the
quarter. Performance throughout the region was mixed, with Switzerland the
strongest performer (+8.2% U.S. dollars, +8.7% local). The Swiss market
benefited from the $25 billion merger of UBS and Swiss Bank Corp., as well as
from its heavy weighting in defensive pharmaceutical stocks. Financial stocks
throughout Europe have performed well during the past several months as interest
rates have fallen and restructuring has just begun within the industry. In
addition, a "flight to quality" prompted by the Asian crisis saw investors
moving toward the more liquid markets and currencies of Germany, Switzerland and
France. Exporters and other companies with exposure to Asia also suffered during
the quarter with capital goods, electronics, autos, metals and paper all
noticeably weak. Among the weakest European markets was Finland, which suffered
as Nokia, the cellular telephone manufacturer which comprises a third of the
Finnish index, fell over 10% during December alone. On the positive side,
restructuring and merger activity continues at a robust pace in Europe, with six
mergers/acquisitions worth approximately $87 billion announced on a single day
in October. Industry consolidation should continue as European Monetary Union
(EMU) is forcing companies to reevaluate their competitive positions and seek
partners across borders.

Against this backdrop, the Portfolio performed in line with the benchmark MSCI
EAFE Index. Near the start of the fourth quarter, we further reduced our
exposure to both Asia and Japan,

22
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

preferring to increase cash levels given our bearish outlook. Our regional
allocation, in which we were underweight in Japan and Asia and neutral in
Europe, contributed positively to performance, while stock selection
particularly in Europe provided an offset. Specifically, our underweight in
European financials and our exposure to smaller capitalization stocks in Germany
and Switzerland were negatives for the Portfolio. Small caps suffered during the
fourth quarter as investors sought safety in the liquidity of large cap names.
Certain export-oriented companies, like SGS Thomson Microelectronics (-34% for
the quarter) and Volkswagen (-19% for the quarter) and Philips Electronics (-29%
for the quarter) detracted from performance. Our Hong Kong property stocks were
hurt as interest rates there rose. On the positive side, stock selection in the
U.K. and in Australia were strong with some of the British consumer products
stocks including Tate & Lyle and Bass contributing strongly to performance.

Looking ahead, we expect the beginning of 1998 to continue to be volatile,
particularly as the Asian crisis plays itself out. The financial sector in both
Asia and Japan are both in fragile shape, and the world will be watching
carefully to see how these difficulties are resolved. The wildcard in Asia will
be whether or not China and in turn Hong Kong allow their currencies to devalue
in light of the competitive devaluations sweeping the region. Although we do not
believe such a devaluation is likely near term, the possibility nonetheless
makes us cautious about the outlook for the Hong Kong market and the region
overall, as another round of devaluations would likely ensue. We currently are
underweight in Asia relative to the benchmark EAFE Index, with the majority of
our Asian holdings in Australia. In Japan, we believe that the government will
come under increasing pressure to implement policies to stimulate the domestic
economy and reform the banking sector. Thus far, however, the government's
anti-deficit stance has precluded any government spending package or meaningful
tax cut, and no approach has been announced to deal with the weakest banks or
the huge amount of bad debt on bank balance sheets. Therefore, despite
valuations that have become increasingly attractive, we will remain wary and
underweight with regard to the Japanese market until we begin to see signs of a
change. Because of our bearishness regarding these two markets, we have been
holding a higher-than-average amount of cash -- something we view as a
temporary, defensive measure.

Of the developed international regions, we believe Europe offers the most
investment potential for the coming year. As a result, Europe currently
represents our largest weighting, with nearly 70% of the Portfolio invested
there. Restructuring, consolidation and deregulation should continue as EMU
approaches, with companies jockeying for better strategic position in the new
pan-European world. Additionally, with the introduction of the new euro currency
scheduled for 1999, interest rates will continue to converge with rates falling
in the peripheral nations and rising in the core countries. Although we expect
growth to slow as exports of European luxury and capital goods moderate due to
lower Asian demand, overall the environment is benign for European equities. In
particular, we are finding new investment opportunities in the U.K. in companies
offering the attractive combination of strong business franchises with low
capital requirements and managements focused on shareholder value. Overall, we
will continue to monitor conditions around the world, seeking the best
investment opportunities available. We strive to remain agile regarding stock
selection, and will put cash to work as soon as we find suitable opportunities
to do so.

January 1998

23
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

COMMON STOCKS (86.1%)
AUSTRALIA (1.7%)
7,300 Australia New Zealand Banking Group Ltd........................ $ 48
4,600 Commonwealth Bank of Australia................................. 53
2,300 Lend Lease Corp., Ltd.......................................... 45
3,830 National Australia Bank Ltd.................................... 53
11,700 News Corp., Ltd................................................ 65
(a)23,300 Telstra Corp. Ltd. (Installment Receipts -- Final Installment:
AUD 1.35/Share due on 11/17/98).............................. 49
-------
313
-------
AUSTRIA (0.5%)
1,600 Boehler-Uddeholm AG............................................ 94
-------
BELGIUM (0.6%)
2,335 G.I.B. Holdings Ltd............................................ 113
-------
DENMARK (1.5%)
2,200 BG Bank A/S.................................................... 148
1,850 Unidanmark A/S, Class A (Registered)........................... 136
-------
284
-------
FINLAND (2.2%)
450 Kone Oyj, Class B.............................................. 55
17,430 Merita Ltd., Class A........................................... 95
2,490 Metra Oyj, Class B............................................. 59
15,640 Rautaruukki Oyj................................................ 126
6,610 Valmet Oyj..................................................... 91
-------
426
-------
FRANCE (8.3%)
510 Alcatel Alsthom................................................ 65
190 Bongrain....................................................... 80
1,375 Cie de Saint Gobain............................................ 195
1,710 Elf Aquitaine.................................................. 199
(a)2,460 France Telecom................................................. 89
1,040 Groupe Danone.................................................. 186
2,570 Lafarge........................................................ 169
3,350 Legris Industries.............................................. 116
(a)1,600 SGS-Thomson Microelectronics N.V............................... 99
920 Scor........................................................... 44
1,840 Total, Class B................................................. 200
9,135 Usinor Sacilor................................................. 132
-------
1,574
-------
GERMANY (6.8%)
4,020 BASF AG........................................................ 143
3,180 Bayer AG....................................................... 118
300 Buderus AG..................................................... 135
5,640 Gerresheimer Glas AG........................................... 79
1,080 Lufthansa AG................................................... 20
4,800 Lufthansa AG (Bearer).......................................... 90
1,584 Metro AG....................................................... 56
(a)220 Philipp Holzmann AG............................................ 57
718 Plettac AG..................................................... 99
2,680 VEBA AG........................................................ 182

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
360 Viag AG........................................................ $ 197
190 Volkswagen AG.................................................. 106
-------
1,282
-------
HONG KONG (1.4%)
10,000 Cheung Kong Holdings Ltd....................................... 66
5,000 China Light & Power Co., Ltd................................... 28
5,000 Dao Heng Bank Group Ltd........................................ 12
9,200 Hong Kong Telecommunications Ltd............................... 19
2,000 HSBC Holdings plc.............................................. 49
6,000 Hutchison Whampoa Ltd.......................................... 38
8,000 Ng Fung Hong Ltd............................................... 8
4,000 Shanghai Industrial Holdings Ltd............................... 15
3,000 Sun Hung Kai Properties Ltd.................................... 21
2,000 Swire Pacific Ltd., Class A.................................... 11
-------
267
-------
ITALY (3.9%)
5,600 Editoriale L'Expresso S.p.A.................................... 27
32,300 Magneti Marelli S.p.A.......................................... 55
10,000 Marzotto (Gaetano) & Figli S.p.A............................... 125
15,700 Mediaset S.p.A................................................. 77
47,050 Sogefi S.p.A................................................... 120
(a)74,724 Telecom Italia S.p.A. Di Risp (NCS)............................ 329
-------
733
-------
JAPAN (16.4%)
11,000 Amada Co., Ltd................................................. 41
7,000 Asahi Tec Corp................................................. 11
5,000 Canon, Inc..................................................... 116
4,000 Dai Nippon Printing Co., Ltd................................... 75
21,000 Daicel Chemical Industries Ltd................................. 27
6,000 Daifuku Co., Ltd............................................... 29
10,000 Daikin Industries Ltd.......................................... 38
1,200 Family Mart Co., Ltd........................................... 43
4,000 Fuji Machine Manufacturing Co.................................. 97
2,000 Fuji Photo Film Ltd............................................ 77
7,000 Fujitec Co., Ltd............................................... 39
10,000 Fujitsu Ltd.................................................... 107
16,000 Furukawa Electric Co........................................... 69
3,000 Hitachi Credit Corp............................................ 49
16,000 Hitachi Ltd.................................................... 114
5,000 Inabata & Co................................................... 16
11,000 Kaneka Corp.................................................... 50
3,000 Kurita Water Industries Ltd.................................... 31
1,000 Kyocera Corp................................................... 45
4,000 Kyudenko Co., Ltd.............................................. 20
4,000 Lintec Corp.................................................... 62
6,000 Matsushita Electric Industrial Co., Ltd........................ 88
18,000 Mitsubishi Chemical Corp....................................... 26
6,000 Mitsubishi Estate Co., Ltd..................................... 65
16,000 Mitsubishi Heavy Industries Ltd................................ 67
5,000 Mitsumi Electric Co., Ltd...................................... 71
2,000 Murata Manufacturing Co., Ltd.................................. 50
11,000 NEC Corp....................................................... 117
3,000 Nifco, Inc..................................................... 20
1,500 Nintendo Corp., Ltd............................................ 147
13 Nippon Telegraph & Telephone Corp.............................. 112
12,000 Nissan Motor Co................................................ 50
</TABLE>

The accompanying notes are an integral part of the financial statements.

24
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

JAPAN (CONT.)
<TABLE>
<C> <S> <C>
5,000 Nissha Printing Co., Ltd....................................... $ 30
10,000 Ricoh Co., Ltd................................................. 124
3,000 Rinnai Corp.................................................... 45
2,000 Sangetsu Co., Ltd.............................................. 21
3,000 Sankyo Co., Ltd................................................ 68
8,000 Sanwa Shutter Corp............................................. 40
4,000 Sekisui Chemical Co............................................ 20
6,000 Sekisui House Co., Ltd......................................... 39
1,000 Shimamura Co., Ltd............................................. 17
8,000 Shin-Etsu Polymer Co., Ltd..................................... 26
800 Sony Corp...................................................... 71
4,000 Sumitomo Marine & Fire Insurance Co............................ 21
6,000 Suzuki Motor Co., Ltd.......................................... 54
1,000 TDK Corp....................................................... 75
2,000 Tokyo Electron Ltd............................................. 64
25,000 Toshiba Corp................................................... 104
4,000 Toyota Motor Corp.............................................. 115
12,000 Tsubakimoto Chain Co........................................... 43
5,000 Yamaha Corp.................................................... 57
4,000 Yamanouchi Pharmaceutical Co................................... 86
-------
3,089
-------
MALAYSIA (0.2%)
15,000 Tenaga Nasional Bhd............................................ 32
-------
NETHERLANDS (6.1%)
3,960 ABN Amro Holding N.V........................................... 77
1,450 Akzo Nobel N.V................................................. 250
(a)800 Benckiser N.V., Class B........................................ 33
3,060 Hollandsche Beton Groep N.V.................................... 57
4,100 ING Groep N.V.................................................. 173
1,930 KLM Royal Dutch Airlines N.V................................... 71
1,100 Koninklijke Bijenkorf Beheer N.V............................... 69
7,110 Koninklijke KNP BT N.V......................................... 164
2,570 Koninklijke Van Ommeren N.V.................................... 86
2,880 Philips Electronics N.V........................................ 173
-------
1,153
-------
NEW ZEALAND (0.0%)
(a)13,000 AMP NZ Office Trust............................................ 7
600 Fletcher Challenge Forest...................................... 1
-------
8
-------
NORWAY (0.8%)
7,700 Saga Petroleum ASA, Class B.................................... 117
1,015 Sparebanken NOR................................................ 36
-------
153
-------
SINGAPORE (0.9%)
(a)1,450 Creative Technology Ltd........................................ 30
2,000 Development Bank of Singapore Ltd. (Foreign)................... 17
(a)4,000 NatSteel Electronics Ltd....................................... 5
6,400 Oversea-Chinese Banking Corp. (Foreign)........................ 37
2,000 Parkway Holdings Ltd........................................... 5
2,000 Singapore Press Holdings (Foreign)............................. 25
21,000 Summit Holdings Ltd............................................ 5
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
6,000 United Overseas Bank Ltd. (Foreign)............................ $ 33
4,000 Venture Manufacturing Ltd...................................... 11
-------
168
-------
SPAIN (4.0%)
1,390 Banco Bilbao Vizcaya........................................... 45
3,090 Banco Bilbao Vizcaya (Registered).............................. 100
20,000 Iberdrola...................................................... 263
5,000 Telefonica de Espana........................................... 143
18,090 Uralita........................................................ 207
-------
758
-------
SWEDEN (4.9%)
4,825 Esselte AB, Class B............................................ 98
(a)42,330 Nordbanken Holding AB.......................................... 239
4,490 Pharmacia & Upjohn, Inc........................................ 165
2,520 S.K.F. AB, Class B............................................. 54
2,730 Sparbanken Sverige AB, Class A................................. 62
10,210 Spectra-Physics AB, Class A.................................... 193
3,060 Svenska Handelsbanken, Class A................................. 106
-------
917
-------
SWITZERLAND (7.4%)
(a)90 Ascom Holdings AG (Bearer)..................................... 116
92 Bobst AG (Bearer).............................................. 135
425 Forbo Holding AG (Registered).................................. 174
218 Holderbank Financiere Glarus AG, Class B (Bearer).............. 178
172 Nestle (Registered)............................................ 258
20 Novartis AG (Registered)....................................... 32
130 Schindler Holding AG (Registered).............................. 140
97 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................................. 132
100 Sulzer AG (Registered)......................................... 63
783 Valora Holding AG (Registered)................................. 165
-------
1,393
-------
UNITED KINGDOM (18.5%)
(a)25,300 Aggreko plc.................................................... 65
850 Associated British Foods plc................................... 7
6,133 B.A.T. Industries plc.......................................... 56
9,840 Bank of Ireland................................................ 151
15,903 Bank of Scotland............................................... 146
4,510 Bass plc....................................................... 70
15,046 BG plc......................................................... 68
17,110 Booker plc..................................................... 90
19,720 British Telecommunications plc................................. 155
15,020 Bunzl plc...................................................... 58
11,340 Burmah Castrol plc............................................. 197
8,010 Charter plc.................................................... 99
27,700 Christian Salvesen plc......................................... 45
5,530 Commercial Union plc........................................... 77
3,100 Danka Business Systems plc..................................... 12
16,900 Diageo plc..................................................... 155
3,300 Glynwed International plc...................................... 14
17,970 Great Universal Stores plc..................................... 226
31,150 Imperial Tobacco Group plc..................................... 196
23,867 John Mowlem & Co. plc.......................................... 35
17,600 Kwik Save Group plc............................................ 85
</TABLE>

The accompanying notes are an integral part of the financial statements.

25
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
32,660 Medeva plc..................................................... $ 87
13,690 Peninsular & Oriental Steam Navigation Co...................... 156
10,300 Premier Farnell plc............................................ 74
48,010 Premier Oil plc................................................ 42
31,440 Racal Electronic plc........................................... 138
12,919 Reckitt & Colman plc........................................... 203
20,244 Royal & Sun Alliance Insurance Group plc....................... 204
27,420 Scapa Group plc................................................ 105
11,500 Tate & Lyle plc................................................ 95
13,200 Unilever plc................................................... 113
42,340 WPP Group plc.................................................. 189
11,770 Westminster Health Care Holdings plc........................... 71
-------
3,484
-------
TOTAL COMMON STOCKS (COST $16,619)....................................... 16,241
-------
PREFERRED STOCKS (1.6%)
GERMANY (1.6%)
340 Dyckerhoff AG.................................................. 87
930 Hornbach Holding AG............................................ 64
290 Suedzucker AG.................................................. 144
-------
TOTAL PREFERRED STOCKS (COST $315)....................................... 295
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------

CONVERTIBLE BOND (0.0%)
NEW ZEALAND (0.0%)
NZD 13 AMP NZ Office Trust 7.50%, 6/30/03 (COST $8)................... 8
-------
TOTAL FOREIGN SECURITIES (87.7%) (COST $16,942).......................... 16,544
-------
SHORT-TERM INVESTMENT (14.9%)
REPURCHASE AGREEMENT (14.9%)
$2,807 Chase Securities, Inc. 5.95%, dated 12/31/97, due 1/2/98, to be
repurchased at $2,808, collateralized by U.S. Treasury Notes,
5.875%, due 11/15/05, valued at $2,866 (COST $2,807)......... 2,807
-------
</TABLE>

<TABLE>
<C> <S> <C>
FOREIGN CURRENCY (1.3%)
AUD 11 Australian Dollar.............................................. 7
GBP 13 British Pound.................................................. 21
DEM 306 German Mark.................................................... 170
FIM 107 Finnish Markka................................................. 20
ITL 4,651 Italian Lira................................................... 3
JPY 1,661 Japanese Yen................................................... 13
-------
TOTAL FOREIGN CURRENCY (COST $237)....................................... 234
-------
</TABLE>

<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- ----------------------------------------------------------------------------------

TOTAL INVESTMENTS (103.9%) (COST $19,986)................................ $19,585
-------
OTHER ASSETS (1.8%)
Net Unrealized Gain on Foreign Currency Exchange Contracts............. $ 147
Due from Adviser....................................................... 72
Dividends Receivable................................................... 55
Receivable for Investments Sold........................................ 36
Receivable for Portfolio Shares Sold................................... 23
Foreign Withholding Tax Reclaim Receivable............................. 16 349
---------
LIABILITIES (-5.7%)
Payable for Investments Purchased...................................... (984)
Professional Fees Payable.............................................. (52)
Custodian Fees Payable................................................. (21)
Bank Overdraft......................................................... (7)
Administrative Fees Payable............................................ (5)
Payable for Portfolio Shares Redeemed.................................. (3)
Other Liabilities...................................................... (7) (1,079)
--------- ---------
NET ASSETS (100%)................................................................... $ 18,855
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,816,513 outstanding $0.001 par value shares (authorized 500,000,000
shares)........................................................................... $ 10.38
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital..................................................................... $ 19,155
Overdistributed Net Investment Income............................................... (16)
Accumulated Net Realized Loss....................................................... (45)
Unrealized Depreciation on Investments and Foreign Currency Translations............
(239)
---------
NET ASSETS.......................................................................... $ 18,855
---------
---------
</TABLE>

- ---------------------------------------------------

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
--------------- --------- ----------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
U.S.$ 36 $ 36 1/2/98 DKK 244 $ 35 $ (1)
U.S.$ 7 7 1/2/98 FRF 45 7 --
U.S.$ 19 19 1/2/98 NOK 139 19 --
U.S.$ 96 96 1/2/98 ESP 14,423 95 (1)
U.S.$ 208 208 1/2/98 SEK 1,617 204 (4)
U.S.$ 361 361 1/2/98 GBP 218 358 (3)
U.S.$ 27 27 1/2/98 DEM 48 27 --
U.S.$ 54 54 1/5/98 ITL 95,985 54 --
JPY 1,661 13 1/5/98 U.S.$ 13 13 --
JPY 128,177 987 1/29/98 U.S.$1,058 1,058 71
JPY 82,936 639 2/5/98 U.S.$ 705 705 66
JPY 43,123 332 2/5/98 U.S.$ 352 352 20
U.S.$ 128 128 3/5/98 SGD 206 122 (6)
SGD 206 122 3/5/98 U.S.$ 128 128 6
U.S.$ 15 15 3/18/98 SGD 25 15 --
SGD 171 101 3/18/98 U.S.$ 100 100 (1)
--------- --------- -----
$ 3,145 $ 3,292 $ 147
--------- --------- -----
--------- --------- -----
</TABLE>

The accompanying notes are an integral part of the financial statements.

26
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997

- ---------------

(a) -- Non-income producing security
ESP -- Spanish Peseta
DKK -- Danish Krone
FRF -- French Franc
NCS -- Non Convertible Shares
NOK -- Norwegian Krone
NZD -- New Zealand Dollar
SEK -- Swedish Krona
SGD -- Singapore Dollar

- ----------------------------------------------------------------
At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 19,771 $ 1,207 $ (1,627) $ (420)
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $21,861,000 and $4,885,000,
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1997.

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1997 to December 31, 1997,
the Portfolio incurred and elected to defer until January 1, 1998, for U.S.
Federal income tax purposes, net capital losses of approximately $24,000.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE % OF
SECTOR DIVERSIFICATION (000) NET ASSETS
- ------------------------------------------- --------- -------------
<S> <C> <C>
Capital Equipment.......................... $ 4,300 22.8%
Consumer Products.......................... 3,459 18.3
Energy..................................... 1,065 5.6
Finance.................................... 2,605 13.8
Materials.................................. 2,444 13.0
Multi-Industry............................. 299 1.6
Services................................... 2,372 12.6
--------- -----
Total Investments.......................... $ 16,544 87.7%
--------- -----
--------- -----
</TABLE>

The accompanying notes are an integral part of the financial statements.

27
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Capital Goods--Construction 12.0%
Consumer--Cyclical 15.7%
Consumer--Staples 8.7%
Diversified 19.5%
Energy 2.0%
Finance 17.6%
Materials 0.4%
Services 9.9%
Technology 11.6%
Other 2.6%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS

PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ---------------------------------------- ---------------- ----------
<S> <C> <C>
United Technologies Corp. Diversified 9.6%
Cendant Corp. Services 7.8%
Lockheed Martin Corp. Capital Goods- %
Construction 7.2
Clear Channel Communications, Inc. Consumer-Cyclical 3.6%
Berkshire Hathaway, Inc., Class A Diversified 3.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS

VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Diversified $2,419 19.5%
Finance 2,188 17.6%
Consumer Cyclical 1,947 15.7%
Capital Goods-Construction 1,488 12.0%
Technology 1,440 11.6%
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
-------------
<S> <C>
PORTFOLIO(3)................................. 33.05%
INDEX........................................ 34.02%
</TABLE>

1. The S&P 500 Index is an unmanaged index of common stocks.
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C>
Equity Growth S&P 500
Portfolio Index 1
1/2/97* $10,000 $10,000
12/31/97 13,305 13,402
*Commencement of operations
</TABLE>

The Equity Growth Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing primarily in equity securities of medium and
large capitalization companies that, in the judgement of Morgan Stanley Asset
Management, provide above-average potential for capital growth.

For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 33.05% as compared to
34.02% for the S&P 500 Index (the "Index").

After three heady years for the market, Wall Street futurists are, as usual,
divided firmly in the bull and bear camps. We are first and foremost bottom up
investors, focusing on companies, not markets, and tend not to care which way
the U.S. market moves in 1998. But if pushed, we are bullish because the
backdrop for financial assets is so positive:

- inflation and interest rates are at 30-year lows

- the U.S. budget is balanced and U.S. companies seem as strong as ever in
terms of global competitiveness

28
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

- the Fed has enormous flexibility, due to dollar strength and low
inflation, so that short rates will come down quickly if the economy slows

- company managements are very focused on shareholder value creation, much
more so than in prior cycles.

There are some negatives:

- the strong dollar and disinflationary/deflationary trends are combining to
put pressure on corporate profits

- valuations are high on an absolute basis

This in our view, sets up a classic stockpickers' market. We will take earnings
risk over upward interest rate pressure any day. If you can find companies that
are able to rise above the profit pressures and achieve significant earnings
growth, this will be richly rewarded. However, the "safe growth" part of the
U.S. market--stocks like Coca Cola and General Electric--look extended and
pricey to us. We do not see why these stocks need to go down, but on the other
hand they have gone up much more than their respective earnings in recent years
and should at some point enter a phase where the opposite is true. We think
there is much more money to be made in "unsafe growth,"-- i.e., stocks of
companies which have strong fundamentals but where investors still have doubts.

Which brings us to our investment strategy for 1998 which may be best
characterized in terms of a Chinese restaurant menu or "two from column A and
three from column B". Column A consists of stocks infected with investor fears
of "Asian flu," currency and/or economic sensitivity. Column B consists of
stocks of companies that should be insulated against the negative factors
weighing against U.S. corporate profits.

<TABLE>
<CAPTION>
A B
- ---------------------------------------- ----------------------------------------
<S> <C>
United Technologies Cendant
Gulfstream Aerospace Cracker Barrel
Lockheed Martin
</TABLE>

United Technologies (UTX) was the largest holding of the portfolio at December
31, accounting for 9.6% of net assets. United Technologies has been a
significant holding of ours for several years and it has performed quite well.
In late 1997, however, investor concerns over Asian exposure (15% of profits)
and cyclicality (several competitors, such as York, blew up) combined to cause
the stock to correct very sharply. From a peak of $89, the stock declined to the
high $60's and closed out the year at $73. We responded by redoubling our
research efforts during this "breakdown" period for the stock and came away with
the following:

- While Asian operations will get hit in 1998 and 1999, UTX should gain
share in that region and find it much easier to make accretive
acquisitions.

- Dramatic margin gain opportunities, strength in certain businesses (e.g.
Pratt & Whitney) and restructuring activities should more than offset the
operating profit shortfall from Asia, currency and a weakening global
economy.

- We believe the company has become more aggressive in the share repurchase
front than at any time in its history.

- In short, despite what the stock is "telling us," earnings per share (EPS)
growth should be robust and above expectations in 1998 and 1999.

We conclude that UTX stock is in a win-win position following the recent sharp
sell-off. If concerns over Asia fade and the global economy strengthens, the
stock could trade up quickly. If not, the company's buyback should remain
aggressive, enhancing EPS prospects in 1999 and beyond. One year out, we think
United Technologies should trade somewhere between $83 (15 times 1999 estimated
earnings per share of $5.55) and $111(20 times).

29
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

Gulfstream Aerospace, a leading producer of executive jets, is enjoying robust
operating fundamentals, yet the stock has been listless over the past year as
investors fear the effects of a potential economic slowdown. Also worrying
investors is the possibility that Forstman Little, the LBO firm and owner of
about 43% of the company, will pressure the stock by selling shares. At year
end, the stock traded at only $29 1/4, despite consensus EPS expectations of
$2.50 in 1998 and $3.10 in 1999. The balance sheet had no net debt and EPS
estimates had risen over the past several months. Does this seem rather
depressed with a stock market trading at over 20 times? The company obviously
thought so, because on January 5 it announced a stock repurchase for about 10%
of shares. This is highly accretive and caused consensus EPS estimates to rise
to $2.60 and $3.25 for 1998 and 1999, respectively. The stock will probably
never get a market multiple, but if it gets up to 15 times in one year, that is
a juicy $49.

On the less controversial side, we own some stocks of companies that seem
totally insulated from what the world may throw at them. First on the list is
Cendant, the new company formed by the merger of HFS and CUC International. The
merger closed in December, creating a $28 billion market cap growth company that
most investors still do not know very well. HFS became our largest holding early
last year when unfounded investor concerns drove the stock down. At its low
point in early 1997, HFS was down 13% from its 1996 close. It closed 1997 up
38%, or 59% higher than its low of the year, adjusting for the conversion into
Cendant shares.

While not as cheap as it was in early 1997, Cendant's valuation looks fine and
the underlying growth story is the most powerful we know of today. Cendant
combines the country's largest franchiser (HFS) with the preeminent direct
marketing company (CUC). Both companies were exciting on their own but the
combination should be incredible for a variety of reasons. Unlike most
megamergers, cost cutting is not the primary driver of this marriage. Rather,
tremendous revenue and margin gains should accrue from the combination of a huge
inbound telemarketer with the number one outbound telemarketer. Consensus EPS
estimates have drifted higher recently, and currently stand at about $1.28 and
$1.58 for 1998 and 1999, respectively. We believe $1.33 and $1.70 are more
likely, with dynamic growth off the 1999 base expected. One year out, the stock
could trade conservatively at $43 (25 times 1999 estimated earnings) or, less
conservatively, at $51 (30 times).

Another stock which should be somewhat insulated from broader corporate profit
pressures is Cracker Barrel, a 300-unit chain of restaurant/gift shops located
largely on interstate highways throughout the east coast and Midwest. Like many
other restaurant companies and retailers, Cracker Barrel spent 1993 to 1996
battling overbuilding and margin pressure. The best companies came through this
period stronger and with a higher market share. Cracker Barrel is one of the
winners, and is beginning to see margin increases for the first time in many
years, allowing the company to return to its traditional 20% + EPS growth rate.
While the stock has done well over the past two years, it is now still only back
to where it was in mid-1993, with earnings growing every year during this
period. We think Cracker Barrel can earn $1.85 and $2.25 in calendar 1998 and
1999, respectively, and could trade between 20-25 times earnings one year out,
or $45-56.

A final example of a stock somewhat protected from generalized corporate profit
pressure is Lockheed Martin. Pending the closing of its acquisition of Northrop
Grumman, it will be the largest defense company in the world. Significant cost
savings will be achieved from the merger, while increased scale will give
Lockheed Martin an even greater advantage in bidding for large defense
contracts. At the same time, non-defense businesses are growing nicely.
Moreover, the balanced budget in the United States bodes well for defense and
space exploration spending. Finally, the company's huge free cash flow is an
ongoing major positive. Despite all this, Lockheed Martin stock underperformed
the market in 1996 and 1997. In fact, in 1997 it was up a lowly 7.7%. Why? The
most important factor in our view, was the two downward revisions to EPS that
occurred in late 1997. From our perspective, however, they were "false" negative
surprises and we believe the stage has now been set for positive surprises,
hopefully in 1998 but likely in 1999.

The first downward revision came from weakness in a non-core business that will
eventually be sold. The second downward revision was an upward revision in
disguise. In order to be able to buy back

30
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

GE's large stake in Lockheed Martin (10% of the company pro forma) Lockheed was
forced to change from pooling to purchase accounting on its Northrop
acquisition. This means goodwill, a phantom, non-cash expense, must be
amortized, which leads to lower reported EPS but higher cash flow or economic
earnings. Hence, while EPS in 1998 should be about $6.50, economic earnings will
exceed $9.00. We expect 12-15% compounded EPS growth over the longer term. If we
are right and consensus estimates start to rise over the next 12 months, the
valuation should improve. A reasonable one year price target would be 18-20
times reported 1999 EPS of $7.40, or $133 to $148.

January 1998

31
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

COMMON STOCKS (97.4%)
CAPITAL GOODS--CONSTRUCTION (12.0%)
AEROSPACE & DEFENSE (12.0%)
(a)1,400 AVTEAM, Inc., Class A............................ $ 12
39 Boeing Co........................................ 2
(a)7,700 Gulfstream Aerospace Corp........................ 225
(a)3,500 Howmet International, Inc........................ 53
(a)3,600 Litton Industries, Inc........................... 207
9,100 Lockheed Martin Corp............................. 896
100 Northrop Grumman Corp............................ 12
1 Raytheon Co., Class A............................ --
1,000 Thiokol Corp..................................... 81
-------
TOTAL CAPITAL GOODS--CONSTRUCTION............................. 1,488
-------
CONSUMER--CYCLICAL (15.7%)
AUTOMOTIVE (3.2%)
(a)3,900 Avis Rent A Car, Inc............................. 124
2,400 Borg-Warner Automotive, Inc...................... 125
2,000 General Motors Corp.............................. 121
(a)1,100 O'Reilly Automotive, Inc......................... 29
-------
399
-------
BROADCAST--RADIO & TELEVISION (5.6%)
6,100 CBS Corp......................................... 180
(a)5,700 Clear Channel Communications, Inc................ 453
1,000 Time Warner, Inc................................. 62
-------
695
-------
ENTERTAINMENT & LEISURE (1.1%)
(a)1,900 GTECH Holdings Corp.............................. 60
(a)1,900 Viacom, Inc., Class B............................ 79
-------
139
-------
FOOD SERVICE (2.3%)
(a)5,000 Brinker International, Inc....................... 80
6,300 Cracker Barrel Old Country Store, Inc............ 210
-------
290
-------
GAMING & LODGING (0.9%)
4,400 International Game Technology.................... 111
-------
PUBLISHING (1.4%)
1,000 Gannett Co., Inc................................. 62
(a)7,700 Primedia, Inc.................................... 97
(a)200 Universal Outdoor Holdings, Inc.................. 10
-------
169
-------
RETAIL--GENERAL (1.2%)
2,450 Home Depot, Inc.................................. 144
-------
TOTAL CONSUMER--CYCLICAL...................................... 1,947
-------
CONSUMER--STAPLES (8.7%)
BEVERAGES (1.0%)
3,400 Coca Cola Enterprises, Inc....................... 121
-------
TOBACCO (4.3%)
(a)2,300 Consolidated Cigar Holdings, Inc................. 63
8,900 Philip Morris Cos., Inc.......................... 403
2,000 RJR Nabisco Holdings Corp........................ 75
-------
541
-------

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
DRUGS (1.9%)
400 American Home Products Corp...................... $ 31
900 Eli Lilly & Co................................... 63
1,000 Merck & Co., Inc................................. 106
500 Pfizer, Inc...................................... 37
-------
237
-------
FOOD (1.5%)
1,300 Kellogg Co....................................... 64
1,300 Ralston-Ralston Purina Group..................... 121
-------
185
-------
TOTAL CONSUMER--STAPLES....................................... 1,084
-------
DIVERSIFIED (19.5%)
2,400 Allied Signal, Inc............................... 93
(a)9 Berkshire Hathaway, Inc., Class A................ 414
6,000 ITT Industries, Inc.............................. 188
3,700 Loews Corp....................................... 393
2,300 Textron, Inc..................................... 144
16,300 United Technologies Corp......................... 1,187
-------
TOTAL DIVERSIFIED............................................. 2,419
-------
ENERGY (2.0%)
COAL, GAS & OIL (2.0%)
(a)1,300 AES Corp......................................... 61
2,700 Diamond Offshore Drilling, Inc................... 130
700 Schlumberger, Ltd................................ 56
-------
TOTAL ENERGY.................................................. 247
-------
FINANCE (17.6%)
BANKING (2.9%)
800 BankAmerica Corp................................. 58
944 Chase Manhattan Corp............................. 103
900 Citicorp......................................... 114
267 Wells Fargo & Co................................. 91
-------
366
-------
FINANCIAL SERVICES (8.1%)
1,900 American Express Co.............................. 170
300 Cincinnati Financial Corp........................ 42
600 Federal Home Loan Mortgage Corp.................. 25
(a)2,900 Friedman, Billings, Ramsey Group, Inc., Class
A.............................................. 52
1,400 MBNA Corp........................................ 38
1,500 Merrill Lynch & Co............................... 110
2,500 Nationwide Financial Services, Inc., Class A..... 90
2,100 SLM Holding Corp................................. 292
3,400 Travelers Group, Inc............................. 183
-------
1,002
-------
INSURANCE (6.6%)
1,800 Ace Ltd.......................................... 174
4,000 American Bankers Insurance Group, Inc............ 184
1,500 CMAC Investment Corp............................. 91
(a)700 CNA Financial Corp............................... 89
(a)300 ESG Re Ltd....................................... 7
1,100 Hartford Life, Inc., Class A..................... 50
1,900 MGIC Investment Corp............................. 126
</TABLE>

The accompanying notes are an integral part of the financial statements.

32
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------

SHORT-TERM INVESTMENT (3.1%)
REPURCHASE AGREEMENT (3.1%)
$380 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $380,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $390 (COST $380)....... $ 380
-------
TOTAL INVESTMENTS (100.5%) (COST $11,546)....................... 12,482
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.1%)
Cash................................................... $ 1
Receivable for Investments Sold........................ 123
Dividends Receivable................................... 10
Other Assets........................................... 1 135
-----
LIABILITIES (-1.6%)
Payable for Investments Purchased...................... (144)
Investment Advisory Fees Payable....................... (19)
Professional Fees Payable.............................. (23)
Custodian Fees Payable................................. (7)
Administrative Fees Payable............................ (3)
Other Liabilities...................................... (2) (198)
----- -------
NET ASSETS (100%)........................................ $12,419
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 974,652 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $ 12.74
-------
-------

NET ASSETS CONSIST OF:
Paid in Capital................................................. $11,307
Undistributed Net Investment Income............................. 1
Accumulated Net Realized Gain................................... 175
Net Unrealized Appreciation on Investments...................... 936
-------
NET ASSETS...................................................... $12,419
-------
-------
</TABLE>

- ---------------

(a) -- Non-income producing security

- ---------------

At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- ----------------- ---------------
<S> <C> <C> <C>
$ 11,581 $ 999 $ (98) $ 901
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $19,322,000 and $8,821,000,
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1997.

The accompanying notes are an integral part of the financial statements.

33
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Basic Resources 1.5%
Consumer Durables 6.7%
Consumer Services 5.8%
Energy 7.7%
Financial Services 23.5%
Food, Tobacco & Other 5.5%
Health Care 7.0%
Heavy
Industry/Transportation 10.9%
Retail 11.2%
Technology 14.2%
Utilities 3.8%
Other 2.2%
</TABLE>

PERFORMANCE COMPARED TO THE S&P MIDCAP 400 INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................. 40.93%
INDEX......................... 34.05%
</TABLE>

1. The S&P MidCap 400 Index is a value weighted index. The companies chosen for
the Index generally have market values between $800 million and $3 billion,
depending upon current equity market valuations, and represent a broad range
of industry segments within the U.S. economy.
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- --------------------------- ---------------- ---------------
<S> <C> <C>
Universal Corp. Food, Tobacco & %
Other 2.6
Ross Stores, Inc. Retail 1.9%
Franklin Resources, Inc. Financial 1.7%
Services
TJX Companies, Inc. Retail 1.5%
Healthdyne Technologies, Health Care 1.5%
Inc.
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- --------- -------------
<S> <C> <C>
Financial Services $ 2,695 23.5%
Technology 1,623 14.2%
Retail 1,286 11.2%
Heavy Industry/Transportation 1,252 10.9%
Energy 878 7.7%
</TABLE>

COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
MID CAP VALUE S&P MIDCAP 400
PORTFOLIO INDEX 1
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 14,093 13,405
*Commencement of operations
</TABLE>

The Mid Cap Value Portfolio seeks above-average total return over a market cycle
of three to five years by investing in common stocks and other equity securities
of issuers with equity capitalizations in the range of the companies represented
in the S&P MidCap 400 Index.

For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 40.93% as compared to
34.05% for the S&P MidCap 400 Index (the "Index").

Both stock and sector selection played roles in the slight under performance of
the Portfolio over the fourth quarter. Asian worries led to unusual market and
economic events. Electric utilities, despite high valuations, competitive risk,
strict regulation and anemic long-term growth, provided average returns of over
20% in the quarter, due to their credit sensitivity and perceived safety.
Meanwhile, long interest rates fell despite surging economic growth. Under
normal circumstances the Federal Reserve would likely have tightened rates but
could not risk draining liquidity from the market. In general, companies with
stable, domestic earnings exposure were rewarded, regardless of valuation or
long-term growth prospects. As such, food, beverage, consumer service and
utility stocks faired well. Our under weighted positions in utility and
beverages stocks hurt performance, while our over weighting in financial stocks
and under weighting of energy stocks aided performance. As value investors we
continue to search for companies with low valuations and better than average
growth prospects.

34
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

Individual stocks which boosted performance included, First of America Bank
(+44.6%), Nationwide Financial Services (+29.8%) and Storage Technology
(+29.0%). Underperforming stocks including Danka Business Systems (-63.9%),
Microage (-48.1%), and Teradyne (-40.5%).

Asian turmoil has simultaneously raised the possibility of deflation and
inflation. In the event of a worldwide financial crisis/recession commodity
prices will fall, demand will slow and interest rates and profits will decline.
Conversely, if Asian problems remain localized, the current state of low
inflation, low unemployment, falling interest rates and strong economic growth
is unsustainable. Inflation and interest rates are likely to rise. This
uncertainty has led us to increase holdings in utilities, REITs and food stocks,
while reducing Asian-exposed cyclicals and technology stocks.

January 1998

35
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

COMMON STOCKS (96.8%)
BASIC RESOURCES (1.5%)
(a) 400 NS Group, Inc.................................... $ 7
(a)1,700 National Steel Corp., Class B.................... 20
(a)700 Owens-Illinois, Inc.............................. 26
1,100 P.H. Glatfelter Co............................... 20
200 Rohm & Haas Co................................... 19
1,100 Schweitzer-Mauduit International, Inc............ 41
(a)1,700 Tetra Technologies, Inc.......................... 36
-------
169
-------
CONSUMER DURABLES (6.7%)
(a)1,500 AMF Bowling, Inc................................. 37
600 Arvin Industries, Inc............................ 20
2,300 Culp, Inc........................................ 46
1,500 Elbit Systems Ltd................................ 21
1,000 Harley-Davidson, Inc............................. 27
(a)1,300 Lear Corp........................................ 62
1,300 Lone Star Industries, Inc........................ 69
1,600 Lubrizol Corp.................................... 59
4,600 Mascotech, Inc................................... 85
2,900 Southdown, Inc................................... 171
(a)500 Tower Automotive, Inc............................ 21
1,300 Trinity Industries, Inc.......................... 58
(a)1,900 USG Corp......................................... 93
-------
769
-------
CONSUMER SERVICES (5.8%)
200 Central Newspapers, Inc., Class A................ 15
1,400 Dial Corp........................................ 29
(a)300 EVI, Inc......................................... 15
1,300 Hertz Corp., Class A............................. 52
2,000 I. C. Isaacs & Co., Inc.......................... 20
3,700 Journal Register Co.............................. 78
(a)1,000 Lexmark International Group, Inc................. 38
(a)500 MGM Grand, Inc................................... 18
800 McClatchy Newspapers, Inc., Class A.............. 22
200 New York Times Co., Class A...................... 13
(a)1,100 Security Capital Group, Inc., Class B............ 36
4,200 Solutia, Inc..................................... 112
(a)4,600 Valassis Communications, Inc..................... 170
100 Washington Post Co., Class B..................... 49
-------
667
-------
ENERGY (7.7%)
3,600 Allegheny Energy, Inc............................ 117
(a)400 BJ Services Co................................... 29
1,300 CMS Energy Corp.................................. 57
1,000 Columbia Gas System, Inc......................... 79
(a)400 Cooper Cameron Corp.............................. 24
1,600 Diamond Offshore Drilling, Inc................... 77
(a)1,100 Dril-Quip, Inc................................... 39
(a)700 Grey Wolf, Inc................................... 4
(a)500 IRI International Corp........................... 7
(a)1,200 Marine Drilling Co., Inc......................... 25
400 NICOR, Inc....................................... 17
400 National Fuel Gas Co............................. 19
(a)3,800 Noble Drilling Corp.............................. 116
400 ONEOK, Inc....................................... 16

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
(a)900 Precision Drilling Corp.......................... $ 22
800 Santa Fe International Corp...................... 33
400 Sun Co., Inc..................................... 17
1,200 Transocean Offshore, Inc......................... 58
900 Valero Energy Corp............................... 28
1,000 Vintage Petroleum, Inc........................... 19
300 Washington Gas Light Co.......................... 9
(a)1,400 Weatherford Enterra, Inc......................... 61
(a)300 Willbros Group, Inc.............................. 5
-------
878
-------
FINANCIAL SERVICES (22.5%)
BANKING (12.0%)
612 Associated Bancorp............................... 34
1,400 Case Corp........................................ 85
1,600 City National Corp............................... 59
1,700 Colonial BancGroup, Inc.......................... 59
1,000 Comerica, Inc.................................... 90
900 Community First Bankshares, Inc.................. 48
700 Compass Bancshares, Inc.......................... 31
800 Cullen/Frost Bankers, Inc........................ 49
4,800 Dime Bancorp, Inc................................ 145
850 First of America Bank Corp....................... 66
1,500 Long Island Bancorp, Inc......................... 74
800 National Commerce Bancorp........................ 28
4,300 North Fork Bancorp, Inc.......................... 144
700 Northern Trust Corp.............................. 49
(a)900 PFF Bancorp, Inc................................. 18
(a)600 Silicon Valley Bancshares........................ 34
1,200 Southtrust Corp.................................. 76
1,300 Sovereign Bancorp, Inc........................... 27
1,302 Summit Bancorp................................... 69
1,700 Trans Financial, Inc............................. 66
1,400 Webster Financial Corp........................... 93
500 Wilmington Trust Corp............................ 31
-------
1,375
-------
CREDIT & FINANCE (3.6%)
400 AMBAC, Inc....................................... 18
500 Capital One Financial Corp....................... 27
(a)2,200 CIT Group, Inc., Class A......................... 71
700 CMAC Investment Corp............................. 42
1,100 Crestar Financial Corp........................... 63
2,200 Illinova Corp.................................... 59
1,000 Lehman Brothers Holdings, Inc.................... 51
1,300 Money Store (The), Inc........................... 27
(a)2,100 Stirling Cooke Brown Holdings, Ltd............... 51
-------
409
-------
INSURANCE (2.1%)
(a)1,500 ESG Re Ltd....................................... 35
1,900 Everest Reinsurance Holdings, Inc................ 78
600 Exel Ltd......................................... 38
1,000 Mercury General Corp............................. 55
1,100 Reliance Group Holdings, Inc..................... 16
600 Torchmark Corp................................... 25
-------
247
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.

36
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------
<C> <S> <C>
INVESTMENT RELATED COMPANIES (4.3%)
2,200 Bear Stearns Co., Inc............................ $ 105
(a)1,000 Cadillac Fairview Corp........................... 24
2,200 Franklin Resources, Inc.......................... 191
3,900 Nationwide Financial Services, Inc., Class A..... 141
800 Old Republic International Corp.................. 30
-------
491
-------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
500 Kilroy Realty Corp. REIT......................... 14
600 Mack-Cali Realty Corp. REIT...................... 25
800 SL Green Realty Corp. REIT....................... 21
-------
60
-------
TOTAL FINANCIAL SERVICES.................................... 2,582
-------
FOOD, TOBACCO & OTHER (5.5%)
(a)1,200 CTB International Corp........................... 17
(a)300 Consolidated Cigar Holdings, Inc................. 8
1,100 Dean Foods Co.................................... 65
2,100 Dimon, Inc....................................... 55
2,000 Interstate Bakeries Corp......................... 75
900 Lancaster Colony Corp............................ 51
1,400 Michael Foods, Inc............................... 34
700 NIPSCO Industries, Inc........................... 35
7,200 Universal Corp................................... 296
-------
636
-------
HEALTH CARE (7.0%)
(a)500 Biogen, Inc...................................... 18
(a)400 Coherent, Inc.................................... 14
(a)1,500 Datascope Corp................................... 39
(a)4,700 FPA Medical Management, Inc...................... 88
(a)2,100 HEALTHSOUTH Rehabilitation Corp.................. 58
(a)300 Health Care and Retirement Corp.................. 12
(a)8,400 Healthdyne Technologies, Inc..................... 171
(a)1,624 Henry Schein, Inc................................ 57
1,100 ICN Pharmaceuticals, Inc......................... 54
(a)500 Marquette Medical Systems, Inc., Class A......... 13
1,700 Mylan Labs, Inc.................................. 36
(a)600 Personnel Group of America, Inc.................. 20
(a)2,300 Physician Sales & Service, Inc................... 49
(a)800 Universal Health Services, Inc., Class B......... 40
(a)700 Vencor, Inc...................................... 17
(a)700 Vivus, Inc....................................... 8
(a)800 Watson Pharmaceuticals, Inc...................... 26
(a)1,600 Wellpoint Health Networks, Inc................... 68
(a)600 Xomed Surgical Products, Inc..................... 14
-------
802
-------
HEAVY INDUSTRY/TRANSPORTATION (10.9%)
(a)4,300 AccuStaff, Inc................................... 99
1,000 Agco Corp........................................ 29
5,400 Air Express International Corp................... 165
300 Airborne Freight Corp............................ 19
2,400 Arnold Industries, Inc........................... 41
(a)4,300 Atlas Air, Inc................................... 103
(a)900 Aviation Sales Co................................ 34
(a)2,600 Banner Aerospace, Inc............................ 29
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
(a)2,000 CDI Corp......................................... $ 91
2,900 CNF Transportation, Inc.......................... 111
(a)500 Coltec Industries, Inc........................... 12
(a)400 DONCASTERS plc ADR............................... 8
(a)2,100 Interim Services, Inc............................ 54
800 Kaydon Corp...................................... 26
(a)300 Midway Airlines Corp............................. 5
1,500 Miller (Herman), Inc............................. 82
500 Noble Affliliates, Inc........................... 18
(a)3,400 Philip Services Corp............................. 49
1,500 Precision Castparts Corp......................... 90
(a)800 SPS Technologies, Inc............................ 35
1,700 Select Appointments Holdings plc ADR............. 31
(a)600 Stoneridge, Inc.................................. 10
2,000 Teco Energy, Inc................................. 56
(a)600 Triumph Group, Inc............................... 20
(a)500 USA Waste Services, Inc.......................... 20
(a)400 VWR Scientific Products Corp..................... 11
(a)100 Veritas DGC, Inc................................. 4
-------
1,252
-------
RETAIL (11.2%)
1,800 Applebee's International, Inc.................... 33
1,350 Arbor Drugs, Inc................................. 25
(a)2,600 Brylane, Inc..................................... 128
1,300 CVS Corp......................................... 83
(a)1,900 Dan River, Inc................................... 31
(a)600 Fred Meyer, Inc.................................. 22
1,800 Hughes Supply, Inc............................... 63
(a)1,600 Neiman Marcus Group (The), Inc................... 48
(a)3,700 Office Depot, Inc................................ 88
3,750 Pier 1 Imports, Inc.............................. 85
2,700 Richfood Holdings, Inc........................... 76
5,900 Ross Stores, Inc................................. 215
2,500 Russ Berrie & Co., Inc........................... 66
(a)1,500 ShopKo Stores, Inc............................... 33
5,100 TJX Companies, Inc............................... 175
2,500 V.F. Corp........................................ 115
-------
1,286
-------
TECHNOLOGY (14.2%)
(a)1,200 ADC Telecommunications, Inc...................... 50
(a)1,200 Altera Corp...................................... 40
(a)2,100 Analog Devices, Inc.............................. 58
(a)2,100 Avid Technology, Inc............................. 56
(a)1,500 BMC Software, Inc................................ 98
(a)400 Box Hill Systems Corp............................ 4
(a)2,400 Cadence Design Systems, Inc...................... 59
(a)1,600 Computer Products, Inc........................... 36
4,800 Danka Business Systems plc ADR................... 77
(a)800 Electro Scientific Industries, Inc............... 30
(a)2,900 Essex International, Inc......................... 86
(a)1,000 Fiserv, Inc...................................... 49
2,600 General Cable Corp............................... 94
(a)400 HMT Technology Corp.............................. 5
(a)1,200 Inacom Corp...................................... 34
(a)1,900 Intevac, Inc..................................... 19
500 Linear Technology Corp........................... 29
</TABLE>

The accompanying notes are an integral part of the financial statements.

37
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

TECHNOLOGY (CONT.)
<TABLE>
<C> <S> <C>
(a)600 Lattice Semiconductor Corp....................... $ 28
(a)1,600 MicroAge, Inc.................................... 24
(a)2,200 SCI Systems, Inc................................. 96
(a)1,800 Storage Technology Corp.......................... 111
(a)4,000 Stratus Computer, Inc............................ 151
(a)6,100 Symantec Corp.................................... 134
(a)1,000 Tech Data Corp................................... 39
(a)1,200 Technology Modeling Association, Inc............. 13
900 Tektronix, Inc................................... 36
(a)1,800 Teradyne, Inc.................................... 58
(a)3,900 U.S. Office Products Co.......................... 77
(a) 600 USCS International, Inc.......................... 10
(a) 800 United Meridian Corp............................. 22
-------
1,623
-------
UTILITIES (3.8%)
900 Black Hills Corp................................. 32
2,900 Florida Progress Corp............................ 114
1,200 IPALCO Enterprises, Inc.......................... 50
900 LG&E Energy Corp................................. 22
800 New Century Energies, Inc........................ 39
(a)4,200 Nextel Communiations, Inc., Class A.............. 109
1,600 Pinnacle West Capital Corp....................... 68
-------
434
-------
TOTAL COMMON STOCKS (COST $10,072).......................... 11,098
-------
UNIT TRUST (1.0%)
FINANCIAL SERVICES (1.0%)
CREDIT & FINANCE (1.0%)
1,800 S&P 400 Mid-Cap Depository Receipts (COST $113).. 115
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------

SHORT-TERM INVESTMENT (3.5%)
REPURCHASE AGREEMENT (3.5%)
$398 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $398,
collateralized by U.S. Treasury Notes, 5.875%
due 11/15/05, valued at $410 (COST $398)....... 398
-------
TOTAL INVESTMENTS (101.3%) (COST $10,583)................... 11,611
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (1.9%)
Receivable for Investments Sold.................. $ 163
Receivable for Portfolio Shares Sold............. 34
Due From Adviser................................. 10
Dividends Receivable............................. 6
Other Assets..................................... 1 214
-----
LIABILITIES (-3.2%)
Payable for Investments Purchased................ (328)
Professional Fees Payable........................ (27)
Custodian Fees Payable........................... (4)
Administrative Fees Payable...................... (3)
Other Liabilities................................ (2) (364)
----- -------
NET ASSETS (100%)......................................... $11,461
-------
-------
</TABLE>

<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------

NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 860,646 outstanding $0.001 par
value shares (authorized 500,000,000
shares)................................... $13.32
------
------
NET ASSETS CONSIST OF:
Paid in Capital............................. $10,254
Undistributed Net Investment Income......... 1
Accumulated Net Realized Gain............... 178
Net Unrealized Appreciation on
Investments............................... 1,028
------
NET ASSETS.................................. $11,461
------
------
</TABLE>

- ---------------

(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust

- ---------------

At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
------- -------------- -------------- --------------
<S> <C> <C> <C>
$10,598 $ 1,434 $ (421) $ 1,013
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $17,662,000 and $8,255,000
respectively. There were no purchases and sales of long-term U.S. Government
securities for the year ended December 31, 1997.
- ----------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

38
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Apartment 19.2%
Diversified 1.3%
Health Care 6.3%
Land 1.6%
Lodging/Leisure 11.8%
Manufactured Home 6.3%
Office and
Industrial 29.2%
Retail 18.0%
Self Storage 3.1%
Other 3.2%
</TABLE>

PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
-------------
<S> <C>
PORTFOLIO(3)............ 17.99%
INDEX................... 19.17%
</TABLE>

1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System (including dividends).
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on March 3, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ---------------------------------------- ----------------- ----------
<S> <C> <C>
Taubman Centers, Inc. REIT Retail 5.2%
Host Marriott Corp. Lodging/Leisure 5.0%
Nationwide Health Properties, Inc. REIT Health Care 4.9%
Office and
Arden Realty Group, Inc. Industrial 4.7%
Chateau Communities, Inc. REIT Manufactured Home 4.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Office and Industrial $3,808 29.2%
Apartment 2,513 19.2%
Retail 2,352 18.0%
Lodging/Leisure 1,540 11.8%
Healthcare 822 6.3%
</TABLE>

COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
NATIONAL ASSOCIATION OF
REAL ESTATE INVESTMENT
TRUSTS
U.S. REAL ESTATE
PORTFOLIO (NAREIT) EQUITY INDEX 1
<S> <C> <C>
3/3/97* $10,000 $10,000
12/31/97 $11,799 $11,917
*Commencement of operations
</TABLE>

The U.S. Real Estate Portfolio seeks to provide above average current income and
long-term capital appreciation by investing primarily in equity securities of
U.S. and non U.S. companies principally engaged in the U.S. real estate
industry, including real estate investment trusts ("REITS").

For the period from March 3, 1997 (commencement of operations) through December
31, 1997, the Portfolio had a total return of 17.99%, compared to a total return
of 19.17% for the National Association of Real Estate Investment Trusts (NAREIT)
Equity Index (the "Index").

This past year was a very exciting one in the REIT industry and can
appropriately be characterized as a year in which REITs became much more widely
accepted in the investment community. The largest reasons for this acceptance
have been the tremendous growth of the industry, the continued strong
performance of the sector, and potentially of equal importance, positive
attention from the business media.

Total equity capitalization of the REIT industry grew to $145 billion, which
represents a 65% increase over the previous year. The year featured a record
level of new equity issuance of approximately $23 billion. This amount of
issuance exceeded the past three years combined and was

39
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

double the previous record year of 1993 in which the market had been dominated
by IPOs. Although the majority of the issuance was for follow-on offerings by
existing REITs, this year featured a reopening of the window for IPOs with
approximately $3 billion raised in 12 separate transactions. Noteworthy IPOs
included several regional office companies: Boston Properties with a focus in
the Northeast, Tower Realty and S.L. Green Realty both with a focus on the
Manhattan market and Prime Group focused on Chicago. Potentially of greater
interest were the IPOs of Equity Office Properties and AMB Property Corporation,
which involved essentially the conversion of a pension fund advisory business to
a REIT. (It is noteworthy that the office and industrial sectors accounted for
almost one half of the total equity issuance.) We expect equity issuance to
continue at a high rate albeit lower than 1997's pace. We believe that given
current valuations we will continue to see a modest level of IPOs both from
regional operators and from pension fund advisors.

In 1997, we witnessed the continuation of the securitization of real estate
assets. At the private real estate companies in general, and specifically for
those active in the office and industrial sectors, there appeared to be a bit of
a frenzy in which these companies debated proposals to sell their assets, merge
into public companies or proceed with their own IPO. The growth described above
continues the evolution of properties moving from private ownership into the
publicly-listed securities arena. Beyond private real estate companies, the
other large owners of institutional real estate in the U.S. are pension funds.
This past year a number of significant events occurred to indicate that these
pension-controlled assets will also continue to move into the hands of public
companies. They include the strategy of swapping properties for shares of a
public company as well as pension fund advisors rolling-up their real estate
business and converting into public REITs, thus providing their current pension
fund clients with shares in a public company as opposed to interests in a
commingled fund which owns assets.

Participants in the REIT industry have speculated on the timing of a merger wave
as the public real estate market matures beyond its initial proliferation of
IPOs. This past year the merger wave appears to have officially commenced. The
groundbreaking deal was the friendly and surprising merger between Equity Office
Properties (the nation's largest office REIT) with Beacon Properties (Equity's
largest national rival). Generally, the majority of the other merger deals
involved a process of companies expanding to become super-regional or national
players in their sector. The multifamily sector produced the most mergers;
representative transactions include the mergers of Equity Residential Properties
(the nation's largest multifamily REIT) with Evans Withycombe (regional player
in Arizona), Post Properties (Southeast focus) with Columbus Properties
(Southwest focused), Camden Property Trust (Sunbelt focus) both with Paragon
Group (Sunbelt) and then Oasis Residential (Las Vegas), and Apartment Investment
and Management (national) with Ambassador Apartments (Sunbelt).

The largest amount of media attention was generated by the two "paired share"
hotel REITs, Starwood Lodging and Patriot American Hospitality (by virtue of
being grandfathered by Congress these two REITs are able to both own their
hotels as well as the operating company which leases the hotels), with the
greatest excitement coming from the bidding war between Starwood and Hilton
Hotels to purchase ITT Corporation, a battle won by Starwood. Not wanting to be
outdone, Patriot American, which had previously announced a merger with Wyndham
Hotels, has entered into an agreement to purchase Interstate Hotels (both are
public C-corporation hotel companies).

The battle over ITT had a high profile, featuring daily articles in the Wall
Street Journal and other business publications. The maneuvering by Hilton
included an apparent dose of heavy campaigning in Washington D.C. to overturn
the grandfathered-paired share REIT structure. These events caused significant
discussion within the REIT industry and were highlighted at the annual October
NAREIT Conference in which experts discussed the potential for Congress to
tinker not only with the paired share structure but also with other aspects of
the REIT regulations. The current consensus is that there will not be any
immediate action from Congress.

This merger activity set off an interesting discussion involving whether it is
more favorable to own the consolidators or the targets. Given our approach of
selecting securities that offer the best value

40
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

relative to their underlying net property assets it is not surprising that we
often own the targets. Although we are not opposed to owning the consolidators,
if they are in the Portfolio it will likely be as a result of their underlying
relative valuation as opposed to a stated goal to be a large participant in a
sector.

This past year also witnessed certain evolutions in the use of the REIT
structure. Several REITs have or plan to create a "paper-clipped structure"
which attempts to mirror the paired share structure through the creation of an
additional C-corporation with similar Boards and management. If investors owned
shares in both companies they would theoretically have the same effect as owning
a paired share REIT. In addition a number of companies, such as Vornado and
Crescent, have broken the basic mold of focusing on primarily one asset class.
We have also seen the REIT structure utilized for new asset types including
prisons and movie theaters. Finally there were announcements from a multitude of
REITs that have determined that they plan to supplement their current business
plans by investing in or creating an opportunity fund. Clearly, with healthy
investor interest in REITs combined with REITs trading at significant premiums
to asset value, a number of companies are attempting to position themselves as
growth companies. While this objective may be achievable at this stage of the
real estate recovery cycle, it may be far more difficult to implement this type
of approach to real estate investing and strategic direction in other phases of
the real estate cycle. We expect that as the current recovery in the U.S real
estate market continues toward equilibrium we will see a decline in the average
premiums to net asset value at which the companies trade.

With regard to the property markets, we are seeing evidence of an emerging
recovery in the area of new construction of real estate. Despite the disfavor
that real estate development faced in virtually every property sector in the
early 1990's, we have witnessed the financial community, once again, opening
their doors to finance development. Although the real estate market generally
remains in a favorable part of the cycle, this new supply causes us to raise the
following issues. In our modeling of companies we have implemented a negative
reversionary value calculation (to reflect our anticipation of declines in
occupancy caused by oversupply) in calculating the net asset value of companies.
This is particularly true in the limited service hotel business as well for
companies with a concentration of multifamily properties in the Southeast. In
addition we are monitoring a number of industrial markets for oversupply and the
potential for a decline in occupancy. Finally, although we have discussed our
rationale for overweighting the office and upscale full-service hotel markets
for some time, we have begun shifting the portfolio in order to favor those
companies with properties in the most supply constrained locations, which
include urban markets as well as those in California and the Northeast.

The majority of sell-side analysts had proclaimed that 1997 would be a year for
stock-picking as opposed to sector allocation. At the beginning of the year we
declared that there was still room for outperformance through sector allocation.
The chart below outlines the total return performance of the various sectors in
the real estate industry for 1996 and 1997:

<TABLE>
<CAPTION>
TOTAL PERFORMANCE
--------------------
SECTOR 1997 1996
- ---------------------------------------------------------------- -------- ---------
<S> <C> <C>
Apartments...................................................... 16.0% 28.4%
Manufactured Homes.............................................. 18.1% 34.9%
Strip Centers................................................... 21.4% 32.8%
Regional Malls.................................................. 13.7% 44.6%
Outlet Centers.................................................. 0.1% 3.5%
Industrial...................................................... 19.0% 37.0%
Office.......................................................... 29.0% 51.8%
Self Storage.................................................... 3.4% 42.0%
Triple Net Lease................................................ 17.7% 30.8%
Hotel........................................................... 30.1% 49.2%
Total........................................................... 20.3% 35.3%
</TABLE>

Source: NAREIT

41
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

From a market perspective the office and hotel sectors provided the best
performance for the third year in a row. We believe that the increasing supply
in both these markets combined with the prevailing prices of the securities in
these sectors may cause overall returns in 1998 to be substantially less than in
previous years. The self storage and factory outlet sectors drastically
underperformed the Index for two very different reasons. The poor returns in the
factory outlet sector were the result of a continued deterioration in the
fundamentals in the market. Looking forward, we believe this market will
continue to trail due to continued weakness in occupancies and rents. The self
storage market, by contrast, is in equilibrium from a demand-supply perspective,
however share prices had run too far in 1996 and there was not any room for
appreciation in 1997. In 1998 we expect this market will likely return to be a
market performer. As was the case last year, we were unable to explain the
outperformance of the regional mall sector and despite improving occupancies and
reduced bankruptcies, this sector trailed the Index in 1997. The other major
sectors in the Index provided returns similar to the market.

With respect to the performance of the Portfolio from a top down perspective, we
created outperformance through our overweighting of both the office and hotel
sectors and through the underweighting of the self storage and factory outlet
sectors. From a bottom up perspective we created significant outperformance from
our stock-picking in the apartment, manufactured home, industrial, and regional
mall sectors.

From an investment perspective we will continue to pursue a strategy of
overweighting those sectors that offer the best underlying real estate
fundamentals. We believe that in 1998 our overall sector weightings will
probably come closer to approximating market weightings. This is due to two
factors, the first and most relevant is that the relative weightings in the
Index have changed materially and are now more in line with our Portfolio. For
example, we have maintained a hotel weighting ranging from 8 to 15% during the
last several years; in this time the Index weighting has progressed from 4% to a
likely weighting of 13 to 15% after the Starwood and Patriot transactions are
closed and incorporated into the Index. The other factor is that the underlying
valuations have generally adjusted to reflect the relative attractiveness of
each sector. We will continue to provide basic sector weighting guidelines but
it is important to note that we focus in great detail on sub-sectors within
those sectors. As outlined below, we describe which sub-sectors we intend to
overweight and underweight in the coming year:

<TABLE>
<CAPTION>
UNDERPERFORM MARKET PERFORMER OUTPERFORM
- ------------------------------ ------------------------- -------------------------
<S> <C> <C>
CLASS A APARTMENTS CLASS B APARTMENTS CBD OFFICE
Sunbelt Self Storage Upscale Hotels
Economy Lodging Suburban Office Northeast/Pacific Coast
Factory Outlets Industrial
Class B Regional Malls Class A Regional Malls
Midwest
Manufactured Housing
Strip Shopping Centers
</TABLE>

Within this framework, we will, as discussed above, continue to select those
securities that we believe offer the best value relative to our estimate of
their intrinsic asset value.

January 1998

42
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997

<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------

COMMON STOCKS (96.1%)
APARTMENT (19.2%)
1,300 Amli Residential Properties Trust REIT........... $ 29
12,500 Avalon Properties, Inc. REIT..................... 387
14,400 Bay Apartment Communities, Inc. REIT............. 562
15,100 Essex Property Trust, Inc. REIT.................. 529
1,900 Irvine Apartment Communities, Inc. REIT.......... 60
12,500 Oasis Residential, Inc. REIT..................... 279
16,383 Security Capital Atlantic, Inc. REIT............. 346
12,600 Walden Residential Properties, Inc. REIT......... 321
-------
2,513
-------
DIVERSIFIED (1.3%)
(a)11,007 Wellsford Real Properties, Inc................... 172
-------
HEALTH CARE (6.3%)
25,100 Nationwide Health Properties, Inc. REIT.......... 640
4,700 Omega Healthcare Investors, Inc. REIT............ 182
-------
822
-------
LAND (1.2%)
(a)10,948 Atlantic Gulf Communities Corp................... 49
(a)5,400 Catellus Development Corp........................ 108
-------
157
-------
LODGING/LEISURE (11.8%)
6,200 American General Hospitality Corp. REIT.......... 166
(a)13,200 CapStar Hotel Co................................. 453
(a)11,200 Extended Stay America, Inc....................... 139
(a)33,000 Host Marriott Corp............................... 648
(a)100 ITT Corp......................................... 8
(a)4,800 Suburban Lodges of America, Inc.................. 64
(a)2,400 Vail Resorts, Inc................................ 62
-------
1,540
-------
MANUFACTURED HOME (6.3%)
18,000 Chateau Communities, Inc. REIT................... 567
9,400 Manufactured Home Communities, Inc. REIT......... 254
-------
821
-------
OFFICE AND INDUSTRIAL (29.2%)
INDUSTRIAL (6.3%)
13,800 Bedford Property Investors, Inc. REIT............ 302
21,600 Pacific Gulf Properties, Inc. REIT............... 513
-------
815
-------
OFFICE (22.9%)
19,800 Arden Realty Group, Inc.......................... 609
17,700 Brandywine Realty Trust REIT..................... 445
25,400 Brookfield Properties Corp....................... 424
4,800 Brookfield Properties Corp. (Installment
Receipts-second installment: CAD 6.50/Share due
on 2/13/98).................................... 57
13,700 CarrAmerica Realty Corp. REIT.................... 434
6,188 Equity Office Properties Trust REIT.............. 195
10,200 Great Lakes, Inc. REIT........................... 198
15,700 Prime Group Realty Trust REIT.................... 318
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
4,200 Reckson Associates Realty Corp. REIT............. $ 107
8,900 Trizec Hahn Corp. REIT........................... 206
-------
2,993
-------
TOTAL OFFICE AND INDUSTRIAL.................................. 3,808
-------
RETAIL (17.7%)
REGIONAL MALL (10.2%)
13,500 CBL & Associates Properties, Inc. REIT........... 333
6,100 First Union Real Estate REIT..................... 99
51,800 Taubman Centers, Inc. REIT....................... 673
6,500 Urban Shopping Centers, Inc. REIT................ 227
-------
1,332
-------
SHOPPING CENTER (7.5%)
14,000 Burnham Pacific Property Trust REIT.............. 214
17,700 Federal Realty Investment Trust REIT............. 456
6,800 Pan Pacific Retail Properties, Inc. REIT......... 145
3,800 Pennsylvania Real Estate Investment Trust REIT... 93
100 Ramco-Gershenson Properties Trust REIT........... 2
5,300 Western Investment Real Estate Trust REIT........ 73
-------
983
-------
TOTAL RETAIL................................................. 2,315
-------
SELF STORAGE (3.1%)
3,500 Public Storage, Inc. REIT........................ 103
10,400 Shurgard Storage Centers, Inc., Series A, REIT... 302
-------
405
-------
TOTAL COMMON STOCKS (COST $11,718)............................. 12,553
-------
PREFERRED STOCKS (0.4%)
LAND (0.1%)
(a)1,401 Atlantic Gulf Communities Corp................... 15
-------
RETAIL (0.3%)
SHOPPING CENTER (0.3%)
1,100 First Washington Realty Trust, Series A, REIT.... 37
-------
TOTAL PREFERRED STOCKS (COST $48).............................. 52
-------
CONVERTIBLE PREFERRED STOCK (0.2%)
LAND (0.2%)
(a,d)2,003 Atlantic Gulf Communities Corp. (COST $20)....... 22
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------

WARRANTS (0.1%)
LAND (0.1%)
(a,d)2,812 Atlantic Gulf Communities Corp., Class A,
expiring 6/24/04............................... 4
(a,d)2,812 Atlantic Gulf Communities Corp., Class B,
expiring 6/24/04............................... 4
(a,d)2,812 Atlantic Gulf Communities Corp., Class C,
expiring 6/24/04............................... 4
-------
TOTAL WARRANTS (COST $0)....................................... 12
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.

43
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------

SHORT-TERM INVESTMENT (6.5%)
REPURCHASE AGREEMENT (6.5%)
$849 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $849,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $871 (COST $849)....... $ 849
-------
TOTAL INVESTMENTS (103.3%) (COST $12,635)...................... 13,488
--------
OTHER ASSETS (1.1%)
Dividends Receivable................................ $ 81
Receivable for Investments Sold..................... 33
Receivable for Portfolio Shares Sold................ 25 139
-------
LIABILITIES (-4.4%)
Payable for Investments Purchased................... (518)
Professional Fees Payable........................... (27)
Investment Advisory Fees Payable.................... (7)
Payable for Portfolio Shares Redeemed............... (7)
Custodian Fees Payable.............................. (5)
Administrative Fees Payable......................... (3)
Bank Overdraft...................................... (2)
Other Liabilities................................... (3) (572)
------- --------
NET ASSETS (100%)..................................... $13,055
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,144,611 outstanding $0.001 par value shares
(authorized 500,000,000 shares).............................. $ 11.41
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital................................................ $12,107
Undistributed Net Investment Income............................ 4
Accumulated Net Realized Gain.................................. 91
Unrealized Appreciation on Investments......................... 853
--------
NET ASSETS..................................................... $13,055
--------
--------
</TABLE>

- ---------------

(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
CAD -- Canadian Dollar
REIT -- Real Estate Investment Trust

- ----------------------------------------------------------------

At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
COST APPRECIATION (DEPRECIATION) NET APPRECIATION
(000) (000) (000) (000)
- --------- --------------- ----------------- -----------------
<S> <C> <C> <C>
$ 12,651 $ 913 $ (75) $ 838
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $18,992,000 and $7,405,000,
respectively. There were no purchases and sales of long-term U.S. Government
securities for the year ended December 31, 1997.

The accompanying notes are an integral part of the financial statements.

44
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARNING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Basic Resources 5.9%
Consumer Durables 9.5%
Consumer Services 0.4%
Energy 8.5%
Financial Services 18.4%
Food, Tobacco & Other 5.5%
Health Care 5.7%
Heavy
Industry--Transportation 20.1%
Retail 6.2%
Technology 6.0%
Utilities 2.3%
Other 11.5%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ---------------------------------------- ---------------- ----------
<S> <C> <C>
Ford Motor Co. Consumer
Durables 3.3%
International Business Machines Corp. Technology 2.7%
Aeroquip-Vickers, Inc. Heavy Industry-
Transportation 2.2%
Philip Morris Co., Inc. Food, Tobacco &
Other 2.2%
Case Corp. Heavy Industry-
Transportation 2.1%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
---------------------------------------- ------ ----------
<S> <C> <C>
Heavy Industry-Transportation $2,946 20.1%
Financial Services 2,698 18.4%
Consumer Durables 1,393 9.5%
Energy 1,245 8.5%
Retail 909 6.2%
</TABLE>

PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................. 20.98%
INDEX......................... 34.02%
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
VALUE
PORTFOLIO S&P 500 INDEX 1
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 $12,098 $13,402
*Commencement of operations
</TABLE>

The Value Portfolio seeks above-average total return over a market cycle of
three to five years by investing primarily in a diversified Portfolio of common
stocks and other equity securities that are deemed by Miller Anderson &
Sherrerd, LLP to be relatively undervalued based on various measures such as
price/earnings ratios and price/book ratios.

For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 20.98% as compared to
34.02% for the S&P 500 Index (the "Index").

The fourth quarter of 1997 was a difficult one for the Portfolio. Both sector
allocation and stock selection contributed to a performance shortfall. Our
significant underweightings in traditionally defensive sectors of the stock
market such as health care, beverages and personal care products, telephone and
consumer services, penalized relative returns while fear of a global economic
slowdown caused by the crisis in Asian financial markets generated a strong
interest in defensive stocks and an equally strong aversion to economically
sensitive sectors of the market. Poor stock selection in the financial services,
heavy industry, health care and retail sectors also negatively impacted our
performance.

Poor performance in the fourth quarter contributed the bulk of the
underperformance for this disappointing year. Most active managers likewise
struggled again in 1997 with about 90% of all

45
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

equity mutual funds falling behind the index. The past year also represented the
third consecutive year (and the only consecutive three year period since 1958)
in which the market-weighted S&P 500 significantly outperformed an
equal-weighted version of the same index. Because of valuation considerations,
our Portfolio remains somewhat smaller and more economically sensitive than the
Index. Nearly 46% of our Portfolio falls in the under $5 billion market cap
range versus only about 8% for the S&P 500. We had thought 1997 might well be
the year when the market would at last rectify the valuation imbalances in
non-megacap stocks. But, instead, many of the same themes of the past few years
prevailed. Nevertheless, in an increasingly expensive equity market, we continue
to believe that our Portfolio represents not only compelling relative value but
attractive absolute value as well.

During 1997 all of our major decisions including sector allocation, stock
selection, and cash allocation, contributed to the Portfolio's underperformance.
An increasingly expensive equity market with limited new purchase opportunities
supported our case for a cash position in the midpoint of our 0-20% range.
Unfortunately, this decision subtracted about 300 basis points from relative
performance. Sector allocation, primarily a residual of our low price-earnings
restriction, also contributed about 200 basis points of relative
underperformance. Significant overweightings in the cyclical sectors of the
market such as consumer durables, heavy industry, and raw materials penalized
returns. Our decisions to underweight many defensive sectors of the equity
market such as telephones (voluntary), and health care, consumer services,
foods, and personal care sectors (all involuntary due to valuation
considerations) also hurt relative performance. Poor stock selection contributed
to the remaining underperformance. The disappointing performance of individual
holdings in the food and tobacco, health care, heavy industry, and retail
sectors more than overcame positive selection in the technology, raw material,
and consumer durable sectors. Some of our more notable laggards included
Harnischfeger Industries, Tecumseh Products, Seagate Technology, Western
Digital, Talbots, Foundation Health, and Mallinckrodt. Our best performing
individual positions included Ford Motor, Compaq Computer, Delta Airlines,
Kennametal, Stratus Computer, and Great Western Financial.

Strategically, the Portfolio exited 1997 in a fashion substantially similar to
how it began the year, with an overweight in economic sensitivity issues and
underweight in typical growth names. Our largest single sector commitment
remains heavy industry or industrial franchise companies, as we believe our
holdings in Cummins Engine, Parker-Hannifin, Aeroquip-Vickers, Case Corporation,
and Harnischfeger Industries represent excellent industrial franchises at
compelling valuations. Because of investors' perceptions of peak profitability,
this sector of the market currently trades at price-earnings ratio discounts of
25-50% when compared to the S&P 500. We believe current profit levels of our
industrial franchise companies are normal and sustainable. But even if profits
should suffer due to an economic slowdown, this sector's NON-EARNINGS based
valuations such as relative price/sales ratio and dividend yield also offer
healthy support. Another economically sensitive sector, consumer durables, has
become the Portfolio's second largest overweighting. Domestic auto stocks, for
example, represent some of the cheapest businesses in the world today. And the
companies' low price-earnings ratios tell only part of the story. Shares in
General Motors have never been cheaper relative to the S&P 500 Index and the
company itself repurchased $4 billion of stock in 1997. Also noteworthy is Ford,
which, after adjusting for the planned spin-off of the Associates, yields 5.6%
or nearly 3.5 times that of the S&P 500. We believe that under most economic
conditions, our consumer durables holdings represent exceptional value.

The raw material sector represents the Portfolio's third largest overweighting.
Our positions here stress restructuring candidates generating free cash flow and
managements demonstrating a desire to enhance shareholder value. Names that fit
this theme include Dow Chemical, Rohm & Haas, Great Lakes Chemical, and DuPont.
Apart from a minor position in the steel stocks, we are avoiding many commodity
metals, papers, and petrochemical companies. Increased global supply, especially
from Asian producers, should keep commodity prices under pressure during 1998.
Despite another exceptional year of relative performance, financial service
stocks complete our sector overweightings. Banks stocks have been sold down to a
market weight but our appetite for low price-

46
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

earnings insurance stocks remains healthy. Our largest positions in this
undervalued sector are CIGNA Corp., Allstate Corp., Hartford Financial, Everest
Reinsurance, and ReliaStar Financial. We expect further consolidation in the
insurance industry as internal growth becomes more difficult to achieve at this
point in the cycle.

The Portfolio's largest underweightings are concentrated in the typical growth
and non-economically sensitive sectors of the market. Most companies within the
food and tobacco, beverage, personal care, health care and consumer services
sectors are currently just too expensive for our valuation discipline, and
positions that we did hold in the HMOs, commodity food processors, and tobacco
stocks generally penalized relative performance during the year. We well
understand investors' desire to own high quality consumer franchise companies,
but we feel that the market is ignoring excessively high valuations, declining
revenue growth rates, and the impact of the Asian meltdown on these companies'
income statements. The products of Avon Products, Coca-Cola, Gillette Co., and
Procter & Gamble might be staples here, but they probably represent luxuries in
most Asian economies. Economic malaise in these economies will surely slow
demand for many global consumer products, and we do not believe that the market
will long tolerate more growth rate reductions in these companies.

Despite significant underperformance in 1997, the Portfolio retains it modest
weighting in technology stocks. While still holding a few companies such as IBM,
Stratus Computer, Tektronix and Arrow Electronics, we have found it difficult to
find fundamentally sound low price-earnings technology stocks. Technology stocks
have added value over the years but additions to this sector require further
price-earnings contraction.

The most controversial sector weighting for our Portfolio, especially for a low
price-earnings, value manager, remains our underweighting in utilities. Electric
utilities lagged the Index in 1997 while telephone companies outperformed. We
remain concerned about deregulation issues in both sectors. The electric utility
stocks have compelling valuations if the industry retains current profitability
through deregulation, but we doubt that it will. The telephone sector, a second
quintile sector for most of 1997, had a terrific fourth quarter, and with its
recent outperformance it no longer qualifies for our low price-earnings
discipline.

Our current Portfolio characteristics reflect the commitment to value investing
in low price/earnings ratio stocks. Our Portfolio's projected price-earnings
ratio for the next 12 months is 12.5 versus 18.1 for the S&P 500. Our
price/sales ratio, another important valuation parameter in our process, is 76%
against 151% for the Index. Price/cash flow and price/book value ratios are also
at significant discounts to the market. Typically, our Portfolio maintains
growth and profitability characteristics which approach the Index.
Unfortunately, growth has generally now become too expensive for us to own and
still adhere to our valuation restrictions. Because of the current global
economic uncertainty, growth and/or defensive characteristics have become richly
priced. Our Portfolio maintains a projected secular growth rate of 11% versus
13.4 % for the Index and a current return on equity of 17.4% against 22.4% for
the benchmark. While we would prefer to have more low price-earnings, so-called
"broken" growth companies in the Portfolio, we cannot violate our valuation
discipline to accommodate this. We continue to research candidates which would
boost the growth content of the Portfolio but we require disappointments and
resulting valuation contractions to increase positions in these type of
companies.

Our stock market outlook for 1998 remains a cautious one. We entered 1997 with a
similar position only to watch in amazement as the market delivered a third
consecutive year of exceptional returns. Cumulative three-year returns of 125%
for the S&P, which the market delivered from 1995-1997, have occurred only two
other times since 1945 and both from considerably lower starting valuation
levels. However, there did exist some fundamental reasons supporting the current
bull run including lower than expected inflation, exceptional cash flows into
equities, healthy merger and acquisition activity, reasonable profit growth, and
a strong bond market. Many of these factors may persist through 1998. However,
since we enter the new year with very high price-earnings ratios and

47
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

unprecedented price/sales, price/book value and price/dividend ratios, much if
not all of these fundamental improvements appear to be priced into current
market levels. Should these ideal conditions change, equity prices would almost
certainly come under some pressure.

Our fundamental top-down outlook forecasts continued low inflation and low
interest rates through 1998. Our concerns revolve around corporate profitability
and asset allocation issues. With moderating demand, rising labor costs, and a
rising dollar, many large multinational companies, which dominate the S&P 500,
may find it difficult to increase their already historically high levels of
profitability. Revenue growth for the average company has slowed to the mid
single digit range and appears to be decelerating into the new year.
Expectations of 10-12% secular profit growth are built into current valuations,
and 1998 could be the first year in quite some time that profitability is
disappointing. Regarding asset allocation, both household and institutional
equity ownership as a percentage of financial assets is approaching historically
peak levels. Maybe in this new era investors will continue to buy each dip,
believing that every correction represents a new opportunity to increase equity
exposure and, therefore, historical asset allocation guidelines are obsolete.
But if not, stock market valuations cannot well tolerate significant
liquidations from retail or institutional investors. If something "breaks the
spell," it is quite a long way down to historical mean valuations from today's
market levels.

While the market in general appears quite pricey to us, valuations in our low
price-earnings universe appear quite reasonable. Our Portfolio's 12.5
price-earnings ratio includes many high quality industrial franchise companies
selling for less than 10 times 1998 estimated earnings. On either a relative or
absolute basis these valuations are very cheap, and valuation divergences
between many economically sensitive companies and the broad market have never
been wider. We do not know what type of economy 1998 will deliver and we can't
predict with certainty what kind of scenario will generate interest in
economically sensitive stocks. However, we DO know that, fundamentally, many of
our companies have never been better positioned to profit, grow and create
shareholder value. The stock market may continue for some time to ignore the
type of businesses that dominate our Portfolio, but in the long run we believe
that our commitment to value could potentially reward our patience handsomely.

January 1998

48
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

COMMON STOCKS (88.5%)
BASIC RESOURCES (5.9%)
3,000 Cabot Oil & Gas Corp., Class A................... $ 83
1,500 Dow Chemical Co.................................. 152
2,000 E.I. DuPont de Nemours & Co...................... 120
4,100 Great Lakes Chemical Corp........................ 184
4,000 Inland Steel Industries, Inc..................... 69
(a)3,400 National Steel Corp., Class B.................... 39
1,600 Rohm & Haas Co................................... 153
2,000 Westvaco Corp.................................... 63
-------
863
-------
CONSUMER DURABLES (9.5%)
2,800 Dana Corp........................................ 133
10,000 Ford Motor Co.................................... 487
4,200 General Motors Corp.............................. 254
4,800 Goodyear Tire & Rubber Co........................ 305
3,800 Owens Corning.................................... 130
3,000 Tupperware Corp.................................. 84
-------
1,393
-------
CONSUMER SERVICES (0.4%)
1,600 Standard Register Co............................. 56
-------
ENERGY (8.5%)
1,700 Amoco Corp....................................... 145
2,000 Atlantic Richfield Co............................ 160
1,900 British Petroleum plc ADR........................ 151
1,317 Duke Energy Corp................................. 73
3,800 IMC Global, Inc.................................. 125
3,500 Phillips Petroleum Co............................ 170
3,100 Repsol ADR....................................... 132
3,800 Ultramar Diamond Shamrock Corp................... 121
4,900 YPF ADR.......................................... 168
-------
1,245
-------
FINANCIAL SERVICES (18.4%)
BANKING (7.7%)
1,100 Bank of New York Co.............................. 64
2,400 Chase Manhattan Corp............................. 263
1,200 Citicorp......................................... 151
1,400 Crestar Financial Corp........................... 80
5,550 First Union Corp................................. 284
2,500 Mellon Bank Corp................................. 152
1,200 Republic New York Corp........................... 137
-------
1,131
-------
CREDIT & FINANCE (0.6%)
1,600 Federal National Mortgage Association............ 91
-------
INSURANCE (10.1%)
2,300 Allstate Corp.................................... 209
2,300 American General Corp............................ 124
1,400 Chubb Corp....................................... 106
1,200 CIGNA Corp....................................... 208
3,900 Everest Reinsurance Holdings, Inc................ 161
1,700 Hartford Financial Services Group, Inc........... 159
3,600 Old Republic International Corp.................. 134
3,600 ReliaStar Financial Corp......................... 148

<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
3,400 TIG Holdings, Inc................................ $ 113
1,600 Transatlantic Holdings, Inc...................... 114
-------
1,476
-------
TOTAL FINANCIAL SERVICES.................................. 2,698
-------
FOOD, TOBACCO & OTHER (5.5%)
3,900 IBP, Inc......................................... 82
7,200 Philip Morris Co., Inc........................... 326
6,900 RJR Nabisco Holdings Corp........................ 259
3,500 Universal Foods Corp............................. 148
-------
815
-------
HEALTH CARE (5.7%)
4,100 Beckman Instruments, Inc......................... 164
2,000 Bergen Brunswig Corp., Class A................... 84
5,700 Columbia/HCA Healthcare Corp..................... 169
(a)5,570 Foundation Health Corp........................... 125
3,400 Mallinckrodt, Inc................................ 129
(a)3,000 Maxicare Health Plans, Inc....................... 32
(a)2,500 Vencor, Inc...................................... 61
(a)1,700 Wellpoint Health Networks, Inc................... 72
-------
836
-------
HEAVY INDUSTRY/TRANSPORTATION (20.1%)
(a)1,300 AMR Corp......................................... 167
6,700 Aeroquip-Vickers, Inc............................ 329
(a)3,800 Arrow Electronics, Inc........................... 123
2,200 CSX Corp......................................... 119
5,200 Case Corp........................................ 314
1,800 Caterpillar, Inc................................. 87
3,800 Cummins Engine Co., Inc.......................... 225
600 Deere & Co....................................... 35
2,200 Delta Air Lines, Inc............................. 262
1,500 Eaton Corp....................................... 134
(a)1,600 FMC Corp......................................... 108
6,000 Harnischfeger Industries, Inc.................... 212
3,400 Kennametal, Inc.................................. 176
8,800 Olsten Corp...................................... 132
3,650 Parker Hannifin Corp............................. 168
268 Raytheon Corp.................................... 13
3,100 Russell Corp..................................... 82
2,500 TRW, Inc......................................... 133
2,600 Tecumseh Products Co., Class A................... 127
-------
2,946
-------
RETAIL (6.2%)
3,000 Dillard's, Inc., Class A......................... 106
(a)3,700 Federated Department Stores, Inc................. 159
4,300 Sears, Roebuck & Co.............................. 194
2,400 Springs Industries, Inc., Class A................ 125
(a)4,200 Toys 'R' Us, Inc................................. 132
4,200 V.F. Corp........................................ 193
-------
909
-------
TECHNOLOGY (6.0%)
3,800 International Business Machines Corp............. 397
(a)3,500 Quantum Corp..................................... 70
(a)3,800 Seagate Technology, Inc.......................... 73
</TABLE>

The accompanying notes are an integral part of the financial statements.

49
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

TECHNOLOGY (CONT.)
<TABLE>
<C> <S> <C>
(a)5,300 Stratus Computer, Inc............................ $ 201
3,450 Tektronix, Inc................................... 137
-------
878
-------
UTILITIES (2.3%)
1,600 Cinergy Corp..................................... 61
100 Central Maine Power Co........................... 1
2,700 DTE Energy Co.................................... 94
2,700 Entergy Corp..................................... 81
2,300 GPU, Inc......................................... 97
-------
334
-------
TOTAL COMMON STOCKS (COST $12,466).......................... 12,973
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------

SHORT-TERM INVESTMENT (11.2%)
REPURCHASE AGREEMENT (11.2%)
$1,646 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $1,647,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $1,681 (COST $1,646)... 1,646
-------
TOTAL INVESTMENTS (99.7%) (COST $14,112).................... 14,619
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (0.7%)
Receivable for Investments Sold...................... $ 50
Dividends Receivable................................. 18
Receivable for Portfolio Shares Sold................. 17
Due from Adviser..................................... 16 101
----
LIABILITIES (-0.4%)
Professional Fees Payable............................ (27)
Payable for Investments Purchased.................... (17)
Custodian Fees Payable............................... (5)
Administrative Fees Payable.......................... (3)
Bank Overdraft....................................... (1)
Other Liabilities.................................... (3) (56)
---- --------
NET ASSETS (100%)............................................ $ 14,664
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,245,254 outstanding $0.001 par value
shares (authorized 500,000,000 shares)..................... $ 11.78
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital............................................ $ 14,159
Accumulated Net Realized Loss.............................. (2)
Unrealized Appreciation on Investments..................... 507
--------
NET ASSETS................................................... $ 14,664
--------
--------
</TABLE>

- ---------------

(a) -- Non-income producing security
ADR -- American Depositary Receipt

- ---------------
At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 14,113 $ 888 $ (382) $ 506
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $14,100,000 and $1,882,000
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1997.

- ----------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

50
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Argentina 14.8%
Brazil 19.0%
Bulgaria 5.7%
Cayman Islands 3.0%
Ecuador 0.6%
Ivory Coast 1.8%
Jamaica 0.7%
Mauritius 0.6%
Mexico 10.4%
Morocco 1.5%
Netherlands 4.4%
Nigeria 0.5%
Panama 1.3%
Peru 2.5%
Russia 14.0%
United Kingdom 0.7%
Venezuela 11.1%
Other 7.4%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------------------- -------- ----------
<S> <C> <C>
Federative Republic of Brazil Brazil 16.6%
Republic of Venezuela Venezuela 11.1%
Russia Principal Loans Russia 8.7%
United Mexican States Mexico 8.5%
Republic of Argentina Argentina 8.5%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE COUNTRIES
PERCENT
OF
VALUE NET
COUNTRY (000) ASSETS
- ---------------------------------------- ------ --------
<S> <C> <C>
Brazil $5,016 19.0%
Argentina 3,891 14.8%
Russia 3,689 14.0%
Venezuela 2,936 11.1%
Mexico 2,752 10.4%
</TABLE>

PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND PLUS INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
-------------
PORTFOLIO(3)............ 0.76%
<S> <C>
INDEX................... 1.82%
</TABLE>

1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of Brady bonds, loans and Eurobonds, as well as U.S. dollar local
market instruments outstanding and includes Argentina, Brazil, Bulgaria,
Mexico, Nigeria, the Philippines, Poland, Russia, South Africa and Venezuela.
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on June 16, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
J.P. MORGAN EMERGING
EMERGING MARKETS DEBT PORTFOLIO MARKETS BOND PLUS INDEX 1
<S> <C> <C>
6/16/97* $10,000 $10,000
12/31/97 $10,076 $10,182
*Commencement of operations
</TABLE>

The Emerging Markets Debt Portfolio seeks high total return by investing
primarily in fixed income securities of government and government related
issuers located in emerging market countries.

For the period from June 16, 1997 (commencement of operations) through December
31, 1997, the Portfolio had a total return of 0.76% as compared to 1.82% for the
J.P. Morgan Emerging Markets Bond Plus Index (the "Index"). As of December 31,
1997, the Portfolio had a 30-day SEC yield of 10.01%.

1997 was another remarkable year for the emerging debt markets, in several ways.
While the asset class matured, and credit improvements in the broad emerging
world were the order for most of the year, the Asian financial crisis unfolding
at mid-year abruptly changed the risk profile for nearly all emerging countries,
changing investor perceptions as to the proper risk premium for emerging
markets. The weakness across Asia reached full pitch at the end of the fourth
quarter, with sharp sell-offs in the Hong Kong and Korean markets. It continues
into January with serious fears over the

51
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

solvency of Indonesia. The spill-over effects into emerging debt have been
devastating, and in the last quarter of the year the EMD markets experienced
their first significant down quarter for the first time since early 1995.

Broad gains in the monetary, foreign exchange and fiscal areas characterized
many emerging countries for the better part of 1997. The result was a pick-up in
real growth, accompanied by significant declines in inflation, along with
reasonable fiscal and current account balances. In Brazil, inflation came
solidly into annualized single-digit range, as tight monetary policy and fiscal
reform continued. In Russia, progress on the privatization front and sound money
policy also brought inflation close to G10 levels, and allowed interest rates to
fall to real rates of 8-10%, alongside a steady ruble. Venezuelan reforms and
buoyant crude oil process improved that country's debt profile, and Mexico
continued along the path of accelerating growth and improved trade accounts.

A significant theme in 1997 was active external debt management by several large
sovereigns, including Argentina, Brazil, Venezuela and Panama. A declining U.S.
interest rate environment and ample global liquidity allowed these countries to
achieve real present value savings through re-financing relatively expensive
"Brady" (restructured) debt, by issuing new "global" bonds. This trend
significantly improved these borrowers' debt profiles going forward.

For much of the period our Portfolio maintained healthy exposure to the large
Latin and Eastern European markets, while avoiding exposure to Asian borrowers.
As spreads on the benchmark emerging bond index tightened into 375 basis points
over the U.S. yield curve, the Portfolio switched positions out of higher-risk,
higher-yielding markets into better quality credits. By the end of the third
quarter the emerging markets bond index spread had reached a "full value" level
of 350 basis points over Treasuries, and we reduced duration in the Portfolio
accordingly.

The final quarter of the year brought a crisis atmosphere in Asia, and severe
downturns in Hong Kong, Korea and Indonesia hammered prices and pushed up
volatility in the debt markets. Spreads widened out to as far as 800 basis
points over the U.S. yield curve, before ending the year at roughly 500 basis
points over the curve.

The Portfolio's weak performance versus its benchmark during the fourth quarter
came as a result of an overweight position in Venezuela, as well as an
underweight position against U.S. interest rates.

The Asian financial crisis will continue to impact all emerging markets into
1998. Severe dislocations in Asia have created several areas of value for our
Portfolio, and for the first time since the inception of the Portfolio we are
(gradually) building exposure in Asia to what we consider solid sovereign and
corporate issuers with good medium-term prospects. The ripple effects of Asia
will likely keep the overall risk spreads in the broad emerging debt universe
high, as fair value may be deemed to be 400-500 basis points of spread, rather
than 300-400 basis points. More yield is in the market today, and importantly
several non-Asian countries, e.g. Brazil, Mexico, Russia, have been forced by
the Asian crisis to address more forcefully and accelerate long overdue
structural reform. While the stabilization and recovery process in Asia will
take many quarters to materialize, the re-pricing of the overall debt market
over the past four months, along with a re-commitment to a proper policy mix in
many countries, makes the 1998 outlook attractive from a total return
standpoint.

January 1998

52
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------

DEBT INSTRUMENTS (92.6%)
ARGENTINA (14.8%)
BONDS (14.8%)
U.S.$ (e)450 Acindar Industries, (Floating Rate), 11.656%,
11/12/98....................................... $ 452
ARP (e)970 CIA International Telecommunications, 10.375%,
8/1/04......................................... 786
200 CIA International Telecommunications, 10.375%,
8/1/04......................................... 162
U.S.$ 250 IMPSA, 11.75%, 3/27/98........................... 251
ARP 500 Republic of Argentina, 'Euro', 8.75%, 7/10/02.... 435
(e)270 Republic of Argentina, 'Euro', 11.75%,
2/12/07........................................ 257
U.S.$ 450 Republic of Argentina Global Bond, 9.75%,
9/19/27........................................ 431
1,248 Republic of Argentina, (Floating Rate), 6.688%,
3/31/05........................................ 1,117
-------
3,891
-------
BRAZIL (19.0%)
BONDS (19.0%)
(e)250 CSN Iron, 9.125%, 6/1/07......................... 216
500 CSN Iron, 9.125%, 6/1/07......................... 432
1,802 Federative Republic of Brazil, C Bond, (Floating
Rate), (Bearer) PIK, 8.00%, 4/15/14............ 1,417
(n)600 Federative Republic of Brazil Front Loaded
Interest Reduction Bond, Series L, 4.50%,
4/15/09........................................ 444
1,398 Federative Republic of Brazil Global Bond,
10.125%, 5/15/27............................... 1,312
471 Federative Republic of Brazil, Series A,
(Floating Rate), 6.813%, 1/1/01................ 450
228 Federative Republic of Brazil, Series C,
(Floating Rate), (Registered) PIK, 8.00%,
4/15/14........................................ 179
700 Federative Republic of Brazil, Series L,
(Floating Rate), 6.75%, 4/15/09................ 566
-------
5,016
-------
BULGARIA (5.7%)
BONDS (5.7%)
450 Republic of Bulgaria Discount Bond, Series A,
'Euro', (Floating Rate), 6.688%, 7/28/24....... 348
(n)825 Republic of Bulgaria Front Loaded Interest
Reduction Bond, Series A, 2.25%, 7/28/12....... 502
900 Republic of Bulgaria Interest Arrears PDI Bond,
(Floating Rate), 6.688%, 7/28/11............... 660
-------
1,510
-------
CAYMAN ISLANDS (3.0%)
BOND (3.0%)
(e)850 Pera Financial Services Co., 9.375%, 10/15/02.... 799
-------

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
ECUADOR (0.6%)
BOND (0.6%)
U.S.$ (e)100 Conecel, 14.00%, 5/1/02.......................... $ 100
87 Republic of Ecuador PDI Bond, (Floating Rate),
(Registered) PIK 6.688%, 2/27/15............... 57
-------
157
-------
IVORY COAST (1.8%)
BOND (1.8%)
(b,e,u)1,350 Republic of Ivory Coast Front Loaded Interest
Reduction Bond, Zero Coupon, 12/29/49.......... 466
-------
JAMAICA (0.7%)
BOND (0.7%)
200 Government of Jamaica, 9.625%, 7/2/02............ 190
-------
MAURITIUS (0.6%)
BONDS (0.6%)
(e)150 Pindo Deli Financial Mauritius, 10.75%, 10/1/07.. 122
50 Pindo Deli Financial Mauritius, 'Euro', 10.75%,
10/1/07........................................ 41
-------
163
-------
MEXICO (10.4%)
BONDS (10.4%)
220 Bancomex Global Bond, 7.25%, 2/2/04.............. 203
300 CEMEX, 'Euro', 9.50%, 9/20/01.................... 307
700 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.693%, 12/31/19.............. 649
250 United Mexican States Discount Bond, Series B,
(Floating Rate), 6.617%, 12/31/19.............. 232
750 United Mexican States Global Bond, 11.50%,
5/15/26........................................ 891
300 United Mexican States Global Bond, 11.375%,
9/15/16........................................ 344
50 United Mexican States Par Bond,
Series W-A, 6.25%, 12/31/19.................... 42
100 United Mexican States Par Bond,
Series W-B, 6.25%, 12/31/19.................... 84
-------
2,752
-------
MOROCCO (1.5%)
LOAN AGREEMENTS (1.5%)
(l)450 Kingdom of Morocco Restructuring & Consolidation
Agreement, Tranche A, (Floating Rate), 6.656%,
1/1/09 (Participation: J.P. Morgan)............ 391
-------
NETHERLANDS (4.4%)
NOTE (0.8%)
250 APP International Finance, 'Euro', (Floating
Rate), 8.68%, 6/28/99.......................... 204
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.

53
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
BONDS (3.6%)
100 SBS Agro Finance, 'Euro', 10.25%, 7/21/00........ $ 85
(e)1,000 UnExim International Finance BV, 9.875%,
8/1/00......................................... 885
-------
970
-------
1,174
-------
NIGERIA (0.5%)
NOTE (0.5%)
U.S.$ (n)250 Central Bank of Nigeria Promissory Note, 5.092%,
1/5/10......................................... 122
-------
PANAMA (1.3%)
BONDS (1.3%)
150 Republic of Panama, 'Euro', 7.875%, 2/13/02...... 146
200 Republic of Panama Global Bond, 8.875%,
9/30/27........................................ 188
-------
334
-------
PERU (2.5%)
BOND (2.5%)
(n)1,100 Republic of Peru Front Loaded Interest Reduction
Bond, 3.25%, 3/7/17............................ 654
-------
RUSSIA (14.0%)
BONDS (0.6%)
220 Ministry of Finance Tranche IV, GDR, 3.00%,
5/14/03........................................ 147
-------
LOAN AGREEMENTS (9.7%)
(b,l)300 International Bank for Economic Cooperation
(Participation: Salomon Brothers).............. 176
3,700 Russia Principal Loans (Floating Rate) 6.719%,
12/15/20....................................... 2,299
(b,l)150 International Investment Bank 10/28/01
(Participation: Salomon Brothers).............. 91
-------
2,566
-------
NOTES (3.7%)
1,375 Russia Interest Arrears Note, (Floating Rate)
6.719%, 12/2/15................................ 976
-------
3,689
-------
VENEZUELA (11.1%)
BONDS (11.1%)
1,429 Republic of Venezuela Debt Conversion Bond,
Series DL, (Floating Rate), 6.813%, 12/18/07... 1,282
(n)452 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series A, 6.75%, 3/31/07...... 407
1,387 Republic of Venezuela Debt Conversion Bond,
9.25%, 9/15/27................................. 1,247
-------
2,936
-------
STRUCTURED INVESTMENT (0.7%)
UNITED KINGDOM (0.7%)
BONDS (0.7%)
U.S.$ (e)200 ING Bank N.V. Libor or T-Bill Linked Note,
8/14/98........................................ 195
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
TOTAL FOREIGN DEBT INSTRUMENTS (COST $24,905)...................... $24,439
-------
</TABLE>

<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ---------------

COMMON STOCK (0.0%)
UNITED KINGDOM (0.0%)
(a)309 Nextel Communications, Inc.,
Class A (COST $8).............................. 8
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------

RIGHTS (0.0%)
MEXICO (0.0%)
1,461 United Mexican States Value Recovery Rights,
expiring 6/30/03 (COST $0)..................... --
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------

SHORT-TERM INVESTMENT (9.6%)
REPURCHASE AGREEMENT (9.6%)
$2,519 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $2,520,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $2,572 (COST $2,519)... 2,519
-------
</TABLE>

<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (102.2%) (COST $27,432)...................... $ 26,966
---------
OTHER ASSETS (3.8%)
Cash.............................................. $ 16
Interest Receivable............................... 503
Receivable for Portfolio Shares Sold.............. 327
Receivable for Investments Sold................... 157
Other............................................. 6 1,009
---------
LIABILITIES (-6.0%)
Payable for Investments Purchased................. (1,222)
Payable for Portfolio Shares Redeemed............. (312)
Professional Fees Payable......................... (45)
Investment Advisory Fees Payable.................. (5)
Custodian Fees Payable............................ (5)
Administrative Fees Payable....................... (4)
Other Liabilities................................. (4) (1,597)
--------- ---------
NET ASSETS (100%).............................................. $ 26,378
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,727,325 outstanding $0.001 par value shares
(authorized 500,000,000 shares).............................. $ 9.67
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital................................................ $ 27,106
Accumulated Net Realized Loss.................................. (256)
Unrealized Depreciation on Investments and Foreign Currency
Translations................................................. (472)
---------
NET ASSETS..................................................... $ 26,378
---------
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

54
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997

- ---------------

(a) -- Non-income producing security
(b) -- Non-income producing security-in default
(e) -- 144A Security-certain conditions for public sale may exist.
(l) -- Participation interests were acquired through the financial
institutions listed parenthetically.
(n) -- Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
(u) -- Security is subject to delayed delivery -- See note A-6 to Financial
Statement.
GDR -- Global Depositary Receipt
PDI -- Past Due Interest
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.

Floating Rate Security -- Interest rate changes on these instruments are based
upon a designated base rate. The rates shown are those in effect at
December 31, 1997.
- ---------------

At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- --------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 27,624 $ 324 $ (982) $ (658)
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio other than long-term U.S. Government securities and
short-term investments, were $47,682,000 and $23,284,000, respectively. There
were no purchases and sales of long-term U.S. Government securities during the
year ended December 31, 1997.

Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1997 to December 31, 1997 the
Portfolio incurred and elected to defer until January 1, 1998 for U.S. Federal
income tax purposes net capital losses of approximately $64,000 and net currency
losses of approximately $5,000.
- ----------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

55
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Adjustable Rate Mortgages 7.6%
Agency Fixed Rate Mortgages 19.1%
Asset Backed Corporates 11.1%
Collateralized Mortgage Obligations--Agency Collateral
Series 1.2%
Collateralized Mortgage Obligations--Non-Agency Collateral
Series 3.6%
Commercial Mortgage 4.8%
Finance 3.1%
Foreign Governments 2.8%
Industrials 2.3%
Stripped Mortgage Backed Securities--Agency Collateral
Series 0.7%
Telephones 1.0%
U.S. Treasury Securities 37.9%
Utilities 0.4%
Yankee Bonds 2.1%
Other 2.3%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ---------------------------------------- ------------------------- ----------
<S> <C> <C>
U.S. Treasury Securities U.S. Treasury Securities 37.9%
U.S. Government Agency
Government National Mortgage Association Obligations 14.7%
U.S. Government Agency
Federal National Mortgage Association Obligations 9.2%
U.S. Government Agency
Federal Home Loan Mortgage Corporation Obligations 4.7%
Government of Germany Foreign Governments 2.8%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
U.S. Treasury Securities $4,835 37.9%
Agency Fixed Rate Mortgages 2,431 19.1%
Asset Backed Corporates 1,412 11.1%
Adjustable Rate Mortgages 964 7.6%
Commercial Mortgage 618 4.8%
</TABLE>

PERFORMANCE COMPARED TO THE SALOMON BROAD INVESTMENT GRADE INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................. 9.93%
INDEX......................... 10.14%
</TABLE>

1. The Salomon Broad Investment Grade Index is a fixed income market
capitalization-weighted index, including U.S. Treasury, agency, mortgage and
investment grade (BBB or better) corporate securities with maturities of one
year or longer and with amounts outstanding of at least $25 million.
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO SALOMON BROAD INVESTMENT GRADE INDEX 1
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 $10,993 $11,014
*Commencement of operations
</TABLE>

The Fixed Income Portfolio seeks an above-average total return over a market
cycle of three to five years by investing primarily in a diversified portfolio
of U.S. Government and Agencies securities, corporate bonds, mortgage-backed
securities, foreign bonds and other fixed income securities and derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and will
usually be between five and fifteen years.
For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 9.93%, compared to 10.14%
for the Salomon Broad Investment Grade Index (the "Index"). As of December 31,
1997, the Portfolio had a SEC 30-day yield of 5.88%.
U.S. economic activity during 1997 was far stronger than most forecasters
expected, yet inflation was quite low. These conflicting surprises produced a
sharp flattening of the yield-curve. Short-term yields were supported by strong
growth, which led the Federal Reserve to tighten monetary policy in March.
Longer-term rates were pulled down by favorable inflation data, so that by
year-end the yield-curve had become almost completely flat. The trend to a
flatter curve gained momentum in the fourth quarter when the Asian financial
crisis and increased equity market volatility precipitated "flight-to-quality"
support for U.S. Treasury securities prices.

56
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

The outcome of these conflicts was a year without major interest-rate
sensitivity and yield-curve positions. Real interest rates and yield
differentials between short- and long-term maturities were attractive enough
during the first half of the year to prompt us to establish a modest long
position, along with a small "barbell" yield-curve strategy designed to benefit
from a flattening of the yield-curve. These decisions had a small but favorable
impact on relative returns as interest rates declined and the yield-curve
flattened. We seldom believed, however, that the yield-curve contained enough
protection against risks of higher inflation to significantly lengthen the
Portfolio or pursue a more aggressive yield-curve strategy. The interest-rate
sensitivity and yield-curve positions have been neutral since mid-year.
The combination of attractive real rates and an optimistic market assessment of
inflation risk led us to establish a position in Treasury inflation-indexed
bonds (TIPS). Real yields on TIPS were 3.5 percent or higher throughout 1997,
well above the 2.5 percent to 3 percent range we judge as neutral value. By
replacing some nominal Treasuries with TIPS, we focused Portfolio exposures on
real returns, where we see genuine value, in place of exposure to inflation
risk.
Corporates, which had helped performance through the first three quarters of the
year, eventually detracted from relative returns due to widening yield spreads
precipitated exclusively by the fourth quarter Asian financial crisis. We took
advantage of wider spreads to increase corporate holdings near year-end,
especially in the finance and asset-backed sectors, and are overweighted in
corporates at this time. Yankee bond spreads widened significantly as a result
of the Asian crisis. We are carefully monitoring developments in Asia and in the
Yankee bond market, and have taken advantage of selected opportunities while
maintaining a high level of both country and issuer diversification.
Sector and security selection decisions in the mortgage area added the most
relative value during 1997. We eliminated our entire fixed-rate current-coupon
position by mid-year because option-adjusted spreads were no longer high enough
to represent compelling value, but increased holdings of seasoned, high-coupon
fixed-rate mortgages, commercial mortgages, and ARMs, all of which possessed
more attractive spreads. The mortgage position remained structured so as to have
less prepayment sensitivity than the mortgage portion of the Index. We enter the
new year with an overweighted position in mortgages, due largely to our ability
to identify mortgages that are more attractive than those found within the
Index.
Investments in non-dollar bonds were modest during 1997, as few major countries
offered significant real interest rate advantages over U.S. Treasuries. We took
small positions in currency-hedged Canadian and European bonds at times to gain
exposure to their steep yield-curves and high running yields. This exposure
started the year near 5% of the Portfolio and was reduced to 1% during the third
quarter in response to their outperformance. The subsequent increase in foreign
holdings to 3% in the fourth quarter was accompanied by a shift from the 10-year
to the 3-year sector, and did not represent an increase in duration-adjusted
exposure to non-dollar interest rates.
January 1998

57
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

FIXED INCOME SECURITIES (97.7%)
ADJUSTABLE RATE MORTGAGES (7.6%)
Government National Mortgage Association
Various Pools
$ 421 6.00%, 8/20/27-11/20/27.......................... $ 425
153 7.00%, 3/20/25................................... 157
373 7.375%, 4/20/25-6/20/25.......................... 382
-------
964
-------
AGENCY FIXED RATE MORTGAGES (19.1%)
Federal Home Loan Mortgage Corporation
Conventional Pools:
500 7.125%, 7/21/99.................................. 509
59 10.50%, 2/1/15-9/1/16............................ 66
-------
575
-------
Federal National Mortgage Association
Conventional Pools:
350 6.02%, 9/20/99................................... 351
449 7.00%, 2/1/27.................................... 453
16 10.00%, 9/1/10................................... 18
44 11.50%, 7/1/13................................... 50
60 12.00%, 11/1/11-9/1/12........................... 69
-------
941
-------
Government National Mortgage Association
Various Pools:
398 10.00%, 11/15/09-5/15/19......................... 444
101 10.50%, 1/15/18-8/15/20.......................... 115
230 11.00%, 1/15/10-4/15/20.......................... 263
38 11.50%, 8/15/13-9/15/15.......................... 43
43 12.00%, 1/15/14-12/15/14......................... 50
-------
915
-------
2,431
-------
ASSET BACKED CORPORATES (11.1%)
75 Advanta Mortgage Loan Trust, Series 97-4 A2
6.53%, 9/25/12................................. 75
Arcadia Auto, Series:
50 97-C A4 6.375%, 1/15/03.......................... 50
75 97-D A3 6.20%, 5/15/03........................... 75
75 Banc One Auto Grantor Trust, Series 97-B A 6.29%,
7/20/04........................................ 75
50 CIT Group Home Equity Loan Trust, Series 97-1 A3
6.25%, 9/15/01................................. 50
75 Chevy Chase, Series 97-4 A 6.25%, 6/15/04........ 75
46 Daimler Benz, Series 97-A 6.05%, 3/31/05......... 46
Empire Funding Home Loan Owner Trust, Series:
50 97-4 A2 7.16%, 5/25/12........................... 51
75 97-5 A2 6.59%, 5/25/14........................... 75
100 First Plus Home Loan Trust, Series 97-4 A2 6.30%,
8/10/09........................................ 100
95 First Security Auto Grantor Trust, Series 97-B A
6.10%, 4/15/03................................. 95
100 Ford Credit Auto Owner Trust, Series 97-B A3
6.05%, 4/15/01................................. 100
50 Green Tree Financial Corporation, Series 97-7 A3
6.18%, 9/15/09................................. 50
Honda Auto Receivables Grantor Trust, Series:
92 97-A 5.95%, 5/15/03.............................. 92
83 97-A A 5.85%, 2/15/03............................ 83
75 Key Auto Finance, Series 97-2 AP 6.15%,
10/15/03....................................... 75

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------
$ 70 Nissan Auto Receivables Grantor Trust, Series
97-A A 6.15%, 2/15/03.......................... $ 70
50 UCFC Home Equity Loan, Series 97-D A2 6.475%,
6/15/12........................................ 50
50 WFS Financial Owner Trust, Series 97-C A3 6.01%,
3/20/02........................................ 50
75 World Omni Automobile Lease Securitization,
Series 97-B A2 6.08%, 11/25/03................. 75
-------
1,412
-------
COLLATERALIZED MORTGAGE OBLIGATIONS--
AGENCY COLLATERAL SERIES (1.2%)
Federal Home Loan Mortgage Corporation, Series:
5 1709 H PO REMIC 1/15/24.......................... 3
8 1750 C PO REMIC 3/15/24.......................... 7
5 1813 K PO 2/15/24................................ 4
10 1844 PC PO 3/15/24............................... 7
5 1887 I PO 10/15/22............................... 4
-------
25
-------
Federal National Mortgage Association, Series:
13 93-149 O PO REMIC 8/25/23........................ 9
50 96-5 NH PO 4/25/24............................... 32
10 96-14 PC PO REMIC 12/25/23....................... 6
10 96-46 PB PO REMIC 9/25/23........................ 7
5 96-54 N PO REMIC 7/25/23......................... 4
10 96-54 O PO 11/25/23.............................. 7
50 97-3 E PO 12/25/23............................... 36
49 287 1 PO 12/17/07................................ 33
-------
134
-------
159
-------
COLLATERALIZED MORTGAGE OBLIGATIONS--
NON-AGENCY COLLATERAL SERIES (3.6%)
75 Commercial Mortgage Acceptance Corp., Series
97-ML1 A2 6.53%, 12/15/30...................... 77
50 J. P. Morgan Commercial Mortgage Finance Corp.,
Series 97-C5 A2 7.069%, 9/15/29................ 52
50 Lehman Large Loan, Series 97-LLI A2 6.84%,
9/12/06........................................ 51
Residential Accredit Loans, Inc., Series:
50 97-QS12 A7 REMIC 7.25%, 11/25/27................. 51
100 97-QS13 A7 REMIC 7.25%, 12/25/27................. 101
125 98-1 A8 REMIC 7.00%, 1/15/28..................... 125
-------
457
-------
COMMERCIAL MORTGAGE (4.8%)
50 CS First Boston Mortgage Securities Corp., Series
97-C1 A1C 7.24%, 6/20/29....................... 52
First Union-Lehman Brothers Commercial Mortgage,
Series:
75 97-C1 A2 7.30%, 12/18/06......................... 78
75 97-C2 A3 6.65%, 6/18/08.......................... 76
50 GMAC Commercial Mortgage Securities, Inc.,
Series:
97-C1 A2 6.853%, 9/15/06....................... 51
75 97 C2 A3 6.566%, 4/15/29......................... 76
50 Merrill Lynch Mortgage Investors, Inc., Series
96-C2 A2 6.82%, 11/21/28....................... 51
75 Midland Realty Acceptance Corp., Series 96-C2 A2
7.233%, 1/25/27................................ 78
Mortgage Capital Funding, Inc., Series:
50 97-MC1 A3 7.288%, 7/20/27........................ 53
</TABLE>

The accompanying notes are an integral part of the financial statements.

58
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------
<C> <S> <C>
$ 75 97-MC2 A2 6.664%, 9/20/07........................ $ 76
250 Nomura Asset Securities Corp., Series 97-D5 PS
(Floating Rate) 11.3671%, 10/14/17............. 27
-------
618
-------
FINANCE (3.1%)
50 BankAmerica Capital Corp., Series 2
8.00%, 12/15/26................................ 54
70 BT Preferred Capital Trust, Series II
7.875%, 2/25/27................................ 73
100 First Union Institutional Capital, Series I
8.04%, 12/1/26................................. 107
40 NB Capital Trust 8.25%, 4/15/27.................. 44
35 Washington Mutual Capital 8.375%, 6/1/27......... 38
70 Wells Fargo Capital, Series I 7.96%, 12/15/26.... 74
-------
390
-------
FOREIGN GOVERNMENT (2.8%)
630 Republic of Germany, Series 116, 5.75%
08/22/00....................................... 362
-------
INDUSTRIALS (2.3%)
22 DR Securitized Lease Trust, Series 93-K1 A1
6.66%, 8/15/10................................. 20
10 DR Structured Finance, Series 94-K2 9.35%,
8/15/19........................................ 10
40 HMH Properties, Inc., Series B 8.875%, 7/15/07... 42
50 Kmart Corp. 7.75%, 10/1/12....................... 49
News America Holdings
40 8.875%, 4/26/23.................................. 47
20 7.75%, 1/20/24................................... 21
65 Paramount Communications, Inc. 8.25%, 8/1/22..... 66
45 Southland Corp. 5.00%, 12/15/03.................. 39
-------
294
-------
STRIPPED MORTGAGE BACKED SECURITIES--
AGENCY COLLATERAL SERIES (0.7%)
Federal National Mortgage Association, Series:
39 249 1 PO 10/25/23................................ 27
94 282 1 PO 5/15/24................................. 68
-------
95
-------
TELEPHONES (1.0%)
45 Cablevision Systems Corp. 7.875%, 12/15/07....... 46
(n)95 Teleport Communications Group, Inc.
0.00%, 7/1/07.................................. 78
-------
124
-------
U.S. TREASURY SECURITIES (37.9%)
1,175 U.S. Treasury Bond 8.75%, 8/15/20................ 1,568
-------
U.S. Treasury Notes
331 3.375%, 1/15/07 (Inflation Indexed).............. 323
252 3.625%, 7/15/02 (Inflation Indexed).............. 251
200 6.875%, 7/31/99.................................. 204
550 7.125%, 9/30/99.................................. 562
1,200 7.125%, 2/29/00.................................. 1,235
150 7.25%, 8/15/04................................... 162
100 7.50%, 2/15/05................................... 110
250 7.75%, 11/30/99.................................. 259
-------
3,106
-------
575 U.S. Treasury Strip PO 2/15/19................... 161
-------
4,835
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------

UTILITIES (0.4%)
$ 50 CalEnergy Co., Inc. 7.63%, 10/15/07.............. $ 50
-------
YANKEE BONDS (2.1%)
50 Korea Development Bank 7.375%, 9/17/04........... 40
National Power Corp.
25 7.875%, 12/15/06................................. 22
25 8.40%, 12/15/16.................................. 21
45 Poland Past Due Interest Bond 4.00%, 10/27/14.... 39
80 Republic of Argentina (Floating Rate) 5.50%,
3/31/23........................................ 59
60 Republic of Colombia 8.70%, 2/15/16.............. 58
35 Republic of Venezuela 9.25%, 9/15/27............. 31
-------
270
-------
TOTAL FIXED INCOME SECURITIES (COST $12,326).............. 12,461
-------
SHORT-TERM INVESTMENT (2.9%)
REPURCHASE AGREEMENT (2.9%)
375 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $375,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $385 (COST $375)....... 375
-------
TOTAL INVESTMENTS (100.6%) (COST $12,701)................. 12,836
-------
</TABLE>

<TABLE>
<S> <C> <C>
OTHER ASSETS (3.0%)
Interest Receivable............................. $ 175
Receivable for Investments Sold................. 157
Due from Adviser................................ 38
Net Unrealized Gain on Foreign Currency Exchange
Contracts...................................... 13
Receivable for Daily Variation on Futures
Contracts...................................... 2 385
------
LIABILITIES (-3.6%)
Payable for Investments Purchased............... (330)
Bank Overdraft.................................. (89)
Professional Fees Payable....................... (32)
Administrative Fees Payable..................... (3)
Custodian Fees Payable.......................... (2)
Other Liabilities............................... (5) (461)
------ -------
NET ASSETS (100%)......................................... $12,760
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,225,240 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $ 10.41
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital........................................... $12,530
Undistributed Net Investment Income....................... 2
Accumulated Net Realized Gain............................. 78
Unrealized Appreciation on Investments, Foreign Currency
Translations and Futures Contracts...................... 150
-------
NET ASSETS................................................ $12,760
-------
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.

59
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1997

- ----------------------------------------------------------------

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ------------- ----- ----------- ------------ ----- ---------------
<S> <C> <C> <C> <C> <C>
DEM 660 $ 368 1/30/98 U.S.$ 381 $ 381 $ 13
DEM 5 3 1/30/98 U.S.$ 3 3 --
----- ----- ---
$ 371 $ 384 $ 13
----- ----- ---
----- ----- ---
</TABLE>

- ---------------------------------------------------

FUTURES CONTRACTS:

At December 31, 1997 the following futures contracts were open:

<TABLE>
<CAPTION>
NUMBER AGGREGATE
OF FACE VALUE EXPIRATION UNREALIZED
CONTRACTS (000) DATE APPRECIATION
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Purchases:
U.S. Treasury 2 Year Note 6 U.S.$ 1,246 Mar-98 U.S.$ 2
U.S. Treasury Long Bond 1 U.S.$ 120 Mar-98 1
------------
3
------------
------------
</TABLE>

- ----------------------------------------------------------------

(n) -- Step Bond-coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
DEM -- German Mark
PO -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
Floating Rate Security -- Interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those
in effect on December 31, 1997.
Inflation Indexed Security -- Security includes principal adjustment feature in
which par amount adjusts with the Consumer Price Index to insulate
bonds from the effects of inflation. The face amount shown is that
in effect on December 31, 1997.

- ---------------
At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- ------ ------------ -------------- ------------
<S> <C> <C> <C>
$12,701 $169 $(34) $135
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $6,327,000 and $923,000,
respectively. Long-term U.S. Government securities purchases and sales were
approximately $20,906,000 and $14,135,000, respectively.

At December 31, 1997, a significant portion of the Portfolios' assets were
invested in mortgage and other asset backed investments. These investments are
often traded by one market maker who may also be utilized by the Fund to provide
pricing information used to value such securities. The amounts which will be
realized upon disposition of these securities may differ from the value
reflected on the Statement of Net Assets and the differences could be material.
- ----------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

60
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION.
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.

COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
Asset Backed Corporates 0.7%
Cable 10.2%
Energy 4.0%
Finance 2.4%
Industrials 43.7%
Supermarkets 3.4%
Telephones 13.5%
U.S. Treasury
Securities 6.7%
Utilities 3.9%
Yankee 5.7%
Other 5.8%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ---------------------------------------- ---------------------- ----------
<S> <C> <C>
U.S. Treasury Note U.S. Treasury Security 6.7%
DR Securitized Lease Trust Industrials 4.3%
Viacom, Inc. Industrials 3.6%
Norcal Waste Systems, Inc. Industrials 3.6%
Nextel Communications, Inc. Telephones 3.6%
</TABLE>

<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Industrials $5,458 43.7%
Telephones 1,681 13.5%
Cable 1,278 10.2%
U.S. Treasury Securites 838 6.7%
Yankee 708 5.7%
</TABLE>

PERFORMANCE COMPARED TO THE SALOMON HIGH-YIELD MARKET INDEX(1)
- ------------------------------------

<TABLE>
<CAPTION>
TOTAL RETURNS(2)
YTD
----------------
<S> <C>
PORTFOLIO(3).................. 13.53%
INDEX......................... 13.54%
</TABLE>

1. The Salomon High-Yield Market Index includes public, non convertible
corporate bond issues with at least one year remaining to maturity and $50
million in par amount outstanding which carry a below investment grade
quality rating from either Standard & Poor's or Moody's rating services.
2. Total return for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
return would be lower.
3. Commenced operations on January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
HIGH YIELD
PORTFOLIO SALOMON HIGH-YIELD MARKET INDEX 1
<S> <C> <C>
1/2/97* $10,000 $10,000
12/31/97 $11,353 $11,354
*Commencement of operations
</TABLE>

The objective of the High Yield Portfolio is to achieve above-average total
return over a market cycle of three to five years by investing primarily in a
diversified portfolio of high yield securities, including corporate bonds and
other fixed income securities and derivatives. High yield securities are rated
below investment grade and are commonly referred to as "junk bonds." The
Portfolio's average weighted maturity will ordinarily exceed five years and will
usually be between five and fifteen years.
For the period from January 2, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of 13.53% compared to 13.54%
for the Salomon High-Yield Market (the "Index"). As of December 31, 1997, the
Portfolio had a SEC 30-day yield of 8.19%.
The high yield bond market had another good year in 1997. The Salomon High-Yield
Market Index returned 13.54% compared to the 10.14% return registered by the
Salomon Brothers Broad Investment Grade Index. Declining long term interest
rates and a strong stock market provided a favorable backdrop to high yield
market.

61
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)

Ten-year Treasury rates declined 67 basis points and thirty-year rates declined
72 basis points from the beginning to the end of the year. However short-term
interest rates rose resulting in a relatively flat yield curve. The Federal
Reserve boosted short-term rates in March because of the fear of future
inflation given the strong economy and tight labor market. These fears have not
materialized so far however and the market retreat in March was short lived.
Inflation reports continue to be excellent and the problems in Asia will only
help keep inflation down.
The strong stock market also supported the high yield market. The S&P 500's 33%
rise increased investors' confidence that earnings will continue upwards and
that companies will have ready access to capital. Portfolio holdings such as
Outdoor Systems benefited from IPOs and equity issuance.
The merger and acquisition activity also continued at a high pace. Stock for
stock transactions and mergers into high grade companies effectively delivered
many high yield companies and boosted bond prices. Portfolio holdings Brooks
Fiber and recently Teleport were beneficiaries in this category.
The telecommunications sector was by far the best performer during 1997. The
sector benefited from acquisition activity and from the fact that many of the
securities in the industry tend to have a high duration, so declining rates
helped performance also. This was by far our most heavily weighted sector.
We also did a good job avoiding many landmines in 1997. The supermarket
industry, generally a popular one in the market, had several high profile credit
problems which we avoided. Subprime finance companies and auto suppliers were
also sectors that experienced problems that we successfully avoided.
Emerging markets is another area of importance to our Portfolio. We started the
year with nearly a twenty percent weighting in emerging markets debt. This area
performed spectacularly and as spreads narrowed dramatically we cut our position
by approximately a third. Our timing was fortunate in that this was accomplished
shortly before the Asian crisis. Although we had little exposure to Asia at the
time, Latin credits were also hammered during the rout. Latin bonds rebounded
fairly quickly as opposed to the Asians, but volatility still is evident in
these markets. We have increased our exposure to the Asians as we believe the
International Monetary Fund bailouts will enable the sovereigns and some of the
major corporates to avoid default.
We are well positioned for 1998. We currently have little exposure to cyclical
credits. We maintain a high allocation to the telecommunications sector where
fundamentals continue to appear very positive. The emerging markets sector is
where we hope for more aggressive returns, but we acknowledge the potential
risks. We attempt to mitigate this risk by investing primarily in what we
consider world class companies or those that have very strong sponsorship and in
sovereign issues where we believe there is significant value.
January 1998

62
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

FIXED INCOME SECURITIES (90.6%)
ASSET BACKED CORPORATES (0.7%)
$ 75 Aircraft Lease Portfolio Securitization Ltd.,
Series 96-1 D
12.75%, 6/15/06................................ $ 81
-------
CABLE (6.8%)
Cablevision Systems Corp.
70 7.875%, 12/15/07................................. 71
150 9.875%, 5/15/06.................................. 165
100 Comcast Corp.
1.125%, 4/15/07................................ 66
250 Paramount Communications, Inc.
8.25%, 8/1/22.................................. 252
Rogers Cablesystems Ltd.
220 10.00%, 3/15/05 Series B......................... 243
50 10.125%, 9/1/12.................................. 55
-------
852
-------
ENERGY (4.0%)
150 Nuevo Energy Co.
9.50%, 4/15/06................................. 160
335 Snyder Oil Corp.
8.75%, 6/15/07................................. 341
-------
501
-------
FINANCE (2.4%)
300 Western Financial Bank
8.875%, 8/1/07................................. 298
-------
INDUSTRIALS (43.7%)
300 Advanced Micro Devices, Inc.
11.00%, 8/1/03................................. 323
175 Asia Pulp & Paper, Series A
12.00%, 2/15/04................................ 147
250 Comcast Cellular Holdings, Series B
9.50%, 5/1/07.................................. 261
DR Securitized Lease Trust, Series:
243 93-K1 A1, 6.66%, 8/15/10......................... 225
84 94-K1 A1, 7.60%, 8/15/07......................... 83
230 94-K1 A2, 8.375%, 8/15/15........................ 226
35 DR Structured Finance,
Series 94-K2 9.35%, 8/15/19.................... 36
125 Grand Casinos, Inc.
10.125%, 12/1/03............................... 135
250 Horseshoe Gaming
9.375%, 6/15/07................................ 261
375 Host Marriott Travel Plaza
9.50%, 5/15/05................................. 397
395 ISP Holdings, Inc., Series B
9.00%, 10/15/03................................ 410
(n)300 Intermedia Communications, Inc., Series B
0.00%, 7/15/07................................. 212
105 Kmart Corp.
7.75%, 10/1/12................................. 102
45 Korea Development Bank
7.375%, 9/17/04................................ 36
200 Multicanal
10.50%, 2/1/07................................. 198

<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ (n)385 Norcal Waste Systems, Inc., Series B
13.50%, 11/15/05............................... $ 448
265 Outdoor Systems, Inc.
8.875%, 6/15/07................................ 276
200 Revlon Worldwide, Series B
Zero Coupon, 3/15/01........................... 138
100 SD Warren Co.
12.00%, 12/15/04............................... 112
130 Sinclair Broadcast Group, Inc.
9.00%, 7/15/07................................. 133
250 Station Casinos, Inc.
10.125%, 3/15/06............................... 263
200 TV Azteca, Series B
10.50%, 2/15/07................................ 207
245 Tenet Healthcare Corp.
8.625%, 1/15/07................................ 253
125 Vencor Inc.
8.625%, 7/15/07................................ 125
450 Viacom, Inc.
8.00%, 7/7/06.................................. 451
-------
5,458
-------
SUPERMARKETS (3.4%)
489 Southland Corp.
5.00%, 12/15/03................................ 428
-------
TELEPHONES (13.3%)
Brooks Fiber Properties, Inc.
(n)250 0.00%, 3/1/06.................................. 207
(n)110 0.00%, 11/1/06................................. 88
(n)50 Dial Call Communications, Inc.
0.00%, 12/15/05................................ 46
165 IXC Communications Inc., Series B
12.50%, 10/1/05................................ 190
235 Lenfest Communications, Inc.
8.375%, 11/1/05................................ 242
(n)480 Nextel Communications, Inc.
0.00%, 8/15/04................................. 426
75 Rogers Cantel Inc.
8.30%, 10/1/07................................. 75
(n)475 Teleport Communications Group, Inc.
0.00%, 7/1/07.................................. 388
-------
1,662
-------
U.S. TREASURY SECURITY (6.7%)
800 U.S. Treasury Note
6.50%, 10/15/06................................ 838
-------
UTILITIES (3.9%)
160 Cleveland Electric Illuminating Co., Series B
8.375%, 12/1/11................................ 163
145 Midland Funding Corp. I, Series C-94
10.33%, 7/23/02................................ 156
200 Quezon Power Ltd.
8.86%, 6/15/17................................. 171
-------
490
-------
</TABLE>

The accompanying notes are an integral part of the financial statements.

63
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- -----------

COMMON STOCK (0.2%)
TELEPHONES (0.2%)
(a)743 Nextel Communications, Inc., Class A (COST $12).. 19
-------
PREFERRED STOCK (3.4%)
CABLE (3.4%)
378 Time Warner, Inc., Series M 10.25%, 7/1/16 (COST
$391).......................................... 426
-------
</TABLE>

<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------

RIGHTS (0.0%)
YANKEE BONDS (0.0%)
250,000 United Mexican States Recovery Rights,
expiring 6/30/03 (COST $0)..................... --
-------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------

SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$502 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/2/98, to be repurchased at $502,
collateralized by U.S. Treasury Notes, 5.875%,
due 11/15/05, valued at $517 (COST $502)....... 502
-------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.2%) (COST $11,931).................... 12,263
---------
OTHER ASSETS (2.2%)
Interest Receivable............................ $ 222
Due from Adviser............................... 37
Receivable for Portfolio Shares Sold........... 3
Other.......................................... 8 270
---------
LIABILITIES (-0.4%)
Professional Fees Payable...................... (34)
Administrative Fees Payable.................... (3)
Custodian Fees Payable......................... (2)
Other Liabilities.............................. (4) (43)
--------- ---------
NET ASSETS (100%)........................................... $ 12,490
---------
---------

<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,179,515 outstanding $0.001 par value
shares
(authorized 500,000,000 shares)........................ $ 10.59
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital............................................. $ 12,113
Undistributed Net Investment Income......................... 2
Accumulated Net Realized Gain............................... 43
Unrealized Appreciation on Investments...................... 332
---------
NET ASSETS.................................................. $ 12,490
---------
---------
</TABLE>

- ---------------

(a) -- Non-income producing security
(n) -- Step Bond-coupon rate increases in increments to maturity. Rate
disclosed if as of December 31, 1997. Maturity date disclosed is the
ultimate maturity date.

- ---------------

At December 31, 1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:

<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 11,931 $ 446 $ (114) $ 332
</TABLE>

For the year ended December 31, 1997, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $14,618,000 and $4,322,000
respectively. U.S. Government securities purchases and sales were approximately
$2,822,000 and $1,997,000, respectively.

At December 31, 1997, a significant portion of the Portfolios' assets were
invested in high yield debt. These investments are often traded by one market
maker who may also be utilized by the Fund to provide pricing information used
to value such securities. The amounts which will be realized upon disposition of
these securities may differ from the value reflected on the Statement of Net
Assets and the differences could be material.
- ----------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

64
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 107
Interest 44
Less: Foreign Taxes Withheld (9)
-------
Total Income 142
-------
EXPENSES:
Investment Advisory Fees 68
Less: Fees Waived (68)
-------
Net Investment Advisory Fees --
Custodian Fees 67
Professional Fees 61
Administrative Fees 24
Shareholder Reports 24
Foreign Tax Expense 3
Directors' Fees and Expenses 1
Other 16
Expenses Reimbursed by Adviser (81)
-------
Net Expenses 115
-------
Net Investment Income 27
-------
NET REALIZED GAIN (LOSS) ON:
Investments Sold (2,431)
Foreign Currency Transactions 39
-------
Net Realized Loss (2,392)
-------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes of $4 on unrealized appreciation) (2,843)
Foreign Currency Translations 7
-------
Change in Unrealized Appreciation/Depreciation (2,836)
-------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation (5,228)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(5,201)
-------
-------
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 27
Net Realized Loss (2,392)
Change in Unrealized Appreciation/Depreciation (2,836)
-------
Net Decrease in Net Assets Resulting from Operations (5,201)
-------
DISTRIBUTIONS
Net Investment Income (16)
-------
Total Distributions (16)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 18,447
Distributions Reinvested 9
Redeemed (668)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 17,788
-------
Total Increase in Net Assets 12,571
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $73) $12,571
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,333
Shares Issued on Distributions Reinvested 2
Shares Redeemed (105)
-------
Net Increase in Capital Shares Outstanding 2,230
-------
-------
- ---------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

The accompanying notes are an integral part of the financial statements.

65
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
(000)
<S> <C>
- -----------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 362
Interest 165
Less: Foreign Taxes Withheld (18)
-------
Total Income 509
-------
EXPENSES:
Investment Advisory Fees 279
Less: Fees Waived (279)
-------
Net Investment Advisory Fees --
Custodian Fees 195
Professional Fees 161
Shareholder Reports 115
Amortization of Organizational Costs 92
Administrative Fees 52
Foreign Tax Expense 8
Directors' Fees and Expenses 5
Other 15
Expenses Reimbursed by Adviser (240)
-------
Net Expenses 403
-------
Net Investment Income 106
-------
NET REALIZED GAIN ON:
Investments Sold (includes realized losses from affiliates of
$14,000) 131
Foreign Currency Transactions 64
-------
Net Realized Gain 195
-------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes of $3 on unrealized depreciation) (3,481)
Foreign Currency Translations (118)
Swap Agreements (102)
-------
Change in Unrealized Appreciation/Depreciation (3,701)
-------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation (3,506)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,400)
-------
-------
</TABLE>

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED OCTOBER 1, 1996*
DECEMBER 31, 1997 TO DECEMBER 31, 1996
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 106 $ 8
Net Realized Gain (Loss) 195 (60)
Change in Unrealized Appreciation/Depreciation (3,701) (135)
---------- --------
Net Decrease in Net Assets Resulting from Operations (3,400) (187)
---------- --------
DISTRIBUTIONS:
Net Investment Income (226) (20)
Net Realized Gain (76) --
In Excess of Net Realized Gain (924) --
---------- --------
Total Distributions (1,226) (20)
---------- --------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 39,684 11,993
Distributions Reinvested 1,223 3
Redeemed (13,972) --
---------- --------
Net Increase in Net Assets Resulting from Capital Share Transactions 26,935 11,996
---------- --------
Total Increase in Net Assets 22,309 11,789
NET ASSETS:
Beginning of Period 11,789 --
---------- --------
End of Period (Including undistributed net investment income of $14
and $3, respectively) $34,098 $11,789
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,551 1,205
Shares Issued on Distributions Reinvested 135 1
Shares Redeemed (1,282) --
---------- --------
Net Increase in Capital Shares Outstanding 2,404 1,206
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

66
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 141
Interest 55
Less: Foreign Taxes Withheld (11)
------
Total Income 185
------
EXPENSES:
Investment Advisory Fees 62
Less: Fees Waived (62)
------
Net Investment Advisory Fees --
Professional Fees 58
Administrative Fees 24
Shareholder Reports 20
Custodian Fees 20
Directors' Fees and Expenses 1
Other 3
Expenses Reimbursed by Adviser (37)
------
Net Expenses 89
------
Net Investment Income 96
------
NET REALIZED GAIN (LOSS) ON:
Investments Sold 334
Foreign Currency Transactions (2)
------
Net Realized Gain 332
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 821
Foreign Currency Translations 13
------
Change in Unrealized Appreciation/Depreciation 834
------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 1,166
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,262
------
------
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 96
Net Realized Gain 332
Change in Unrealized Appreciation/Depreciation 834
-------
Net Increase in Net Assets Resulting from Operations 1,262
-------
DISTRIBUTIONS
Net Investment Income (96)
Net Realized Gain (205)
-------
Total Distributions (301)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 14,602
Distributions Reinvested 172
Redeemed (1,028)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 13,746
-------
Total Increase in Net Assets 14,707
NET ASSETS:
Beginning of Period --
-------
End of Period (Including overdistributed net investment income of
$2) $14,707
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,324
Shares Issued on Distributions Reinvested 15
Shares Redeemed (87)
-------
Net Increase in Capital Shares Outstanding 1,252
-------
-------
- ---------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations

The accompanying notes are an integral part of the financial statements.

67
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 309
Interest 105
Less: Foreign Taxes Withheld (40)
------
Total Income 374
------
EXPENSES:
Investment Advisory Fees 116
Less: Fees Waived (116)
------
Net Investment Advisory Fees --
Custodian Fees 97
Professional Fees 89
Administrative Fees 52
Shareholder Reports 40
Directors' Fees and Expenses 1
Other 7
Expenses Reimbursed by Adviser (119)
------
Net Expenses 167
------
Net Investment Income 207
------
NET REALIZED GAIN (LOSS) ON:
Investments Sold (8)
Foreign Currency Transactions 337
------
Net Realized Gain 329
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (398)
Foreign Currency Translations 159
------
Change in Unrealized Appreciation/Depreciation (239)
------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 90
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 297
------
------
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 207
Net Realized Gain 329
Change in Unrealized Appreciation/Depreciation (239)
-------
Net Increase in Net Assets Resulting from Operations 297
-------
DISTRIBUTIONS
Net Investment Income (544)
In Excess of Net Investment Income (16)
Net Realized Gain (37)
-------
Total Distributions (597)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 28,522
Distributions Reinvested 546
Redeemed (9,913)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 19,155
-------
Total Increase in Net Assets 18,855
NET ASSETS:
Beginning of Period --
-------
End of Period (Including overdistributed net investment income of
$16) $18,855
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,663
Shares Issued on Distributions Reinvested 54
Shares Redeemed (900)
-------
Net Increase in Capital Shares Outstanding 1,817
-------
-------
- ---------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

68
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 55
Interest 14
------
Total Income 69
------
EXPENSES:
Investment Advisory Fees 30
Less: Fees Waived (30)
------
Net Investment Advisory Fees --
Professional Fees 32
Custodian Fees 22
Administrative Fees 18
Shareholder Reports 9
Other 2
Expenses Reimbursed by Adviser (36)
------
Net Expenses 47
------
Net Investment Income 22
------
NET REALIZED GAIN ON:
Investments Sold 665
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 936
------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 1,601
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,623
------
------
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 22
Net Realized Gain 665
Change in Unrealized Appreciation/Depreciation 936
-------
Net Increase in Net Assets Resulting from Operations 1,623
-------
DISTRIBUTIONS
Net Investment Income (21)
Net Realized Gain (490)
-------
Total Distributions (511)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 11,079
Distributions Reinvested 374
Redeemed (146)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 11,307
-------
Total Increase in Net Assets 12,419
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $1) $12,419
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 956
Shares Issued on Distributions Reinvested 30
Shares Redeemed (11)
-------
Net Increase in Capital Shares Outstanding 975
-------
-------
- ---------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

69
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 55
Interest 24
------
Total Income 79
------
EXPENSES:
Investment Advisory Fees 47
Less: Fees Waived (47)
------
Net Investment Advisory Fees --
Professional Fees 36
Administrative Fees 16
Custodian Fees 15
Shareholder Reports 12
Directors' Fees and Expenses 1
Other 8
Expenses Reimbursed by Adviser (22)
------
Net Expenses 66
------
Net Investment Income 13
------
NET REALIZED GAIN ON:
Investments Sold 778
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 1,028
------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 1,806
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,819
------
------
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13
Net Realized Gain 778
Change in Unrealized Appreciation/Depreciation 1,028
-------
Net Increase in Net Assets Resulting from Operations 1,819
-------
DISTRIBUTIONS
Net Investment Income (12)
Net Realized Gain (600)
-------
Total Distributions (612)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 9,968
Distributions Reinvested 388
Redeemed (102)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 10,254
-------
Total Increase in Net Assets 11,461
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $1) $11,461
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 838
Shares Issued on Distributions Reinvested 30
Shares Redeemed (7)
-------
Net Increase in Capital Shares Outstanding 861
-------
-------
- ---------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

70
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 222
Interest 39
------
Total Income 261
------
EXPENSES:
Investment Advisory Fees 49
Less: Fees Waived (49)
------
Net Investment Advisory Fees --
Professional Fees 36
Custodian Fees 19
Shareholder Reports 18
Administrative Fees 17
Directors' Fees and Expenses 1
Other 3
Expenses Reimbursed by Adviser (26)
------
Net Expenses 68
------
Net Investment Income 193
------
NET REALIZED GAIN ON:
Investments Sold 318
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 853
------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 1,171
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,364
------
------
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM MARCH 3, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 193
Net Realized Gain 318
Change in Unrealized Appreciation/Depreciation 853
-------
Net Increase in Net Assets Resulting from Operations 1,364
-------
DISTRIBUTIONS
Net Investment Income (189)
Net Realized Gain (227)
-------
Total Distributions (416)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 13,434
Distributions Reinvested 228
Redeemed (1,555)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 12,107
-------
Total Increase in Net Assets 13,055
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $4) $13,055
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,259
Shares Issued on Distributions Reinvested 21
Shares Redeemed (135)
-------
Net Increase in Capital Shares Outstanding 1,145
-------
-------
- ---------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

71
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 112
Interest 62
-----
Total Income 174
-----
EXPENSES:
Investment Advisory Fees 38
Less: Fees Waived (38)
-----
Net Investment Advisory Fees --
Professional Fees 37
Custodian Fees 18
Administrative Fees 17
Shareholder Reports 12
Other 6
Expenses Reimbursed by Adviser (32)
-----
Net Expenses 58
-----
Net Investment Income 116
-----
NET REALIZED GAIN ON:
Investments Sold 249
-----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 507
-----
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 756
-----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 872
-----
-----
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 116
Net Realized Gain 249
Change in Unrealized Appreciation/Depreciation 507
-------
Net Increase in Net Assets Resulting from Operations 872
-------
DISTRIBUTIONS
Net Investment Income (116)
In Excess of Net Investment Income (3)
Net Realized Gain (249)
In Excess of Net Realized Gain (2)
-------
Total Distributions (370)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 13,979
Distributions Reinvested 276
Redeemed (93)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 14,162
-------
Total Increase in Net Assets 14,664
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $0) $14,664
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,229
Shares Issued on Distributions Reinvested 24
Shares Redeemed (8)
-------
Net Increase in Capital Shares Outstanding 1,245
-------
-------
- ---------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

72
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKET DEBT PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JUNE 16, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- -------------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividends $ 1
Interest 839
Less: Foreign Taxes Withheld (1)
-----
Total Income 839
-----
EXPENSES:
Investment Advisory Fees 71
Less: Fees Waived (63)
-----
Net Investment Advisory Fees 8
Professional Fees 48
Administrative Fees 22
Shareholder Reports 19
Custodian Fees 15
Directors' Fees and Expenses 2
Other 6
-----
Net Expenses 120
-----
Net Investment Income 719
-----
NET REALIZED GAIN (LOSS) ON:
Investments Sold 24
Foreign Currency Transactions (4)
-----
Net Realized Gain 20
-----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (466)
Foreign Currency Translations (6)
-----
Change in Unrealized Appreciation/Depreciation (472)
-----
Net Realized Gain and Change in Unrealized Appreciation/Depreciation (452)
-----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 267
-----
-----
</TABLE>

- ---------------

* Commencement of operations

- --------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JUNE 16, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- -------------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 719
Net Realized Gain 20
Change in Unrealized Appreciation/Depreciation (472)
-------
Net Increase in Net Assets Resulting from Operations 267
-------
DISTRIBUTIONS
Net Investment Income (694)
Realized Gain (46)
In Excess of Net Realized Gain (255)
-------
Total Distributions (995)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 41,254
Distributions Reinvested 731
Redeemed (14,879)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 27,106
-------
Total Increase in Net Assets 26,378
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $0) $26,378
-------
-------
- -------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,155
Shares Issued on Distributions Reinvested 79
Shares Redeemed (1,507)
-------
Net Increase in Capital Shares Outstanding 2,727
-------
-------
- -------------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

73
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Interest $ 600
-----
EXPENSES:
Investment Advisory Fees 38
Less: Fees Waived (38)
-----
Net Investment Advisory Fees --
Professional Fees 52
Shareholder Reports 37
Administrative Fees 24
Custodian Fees 8
Directors' Fees and Expenses 1
Other 2
Expenses Reimbursed by Adviser (58)
-----
Net Expenses 66
-----
Net Investment Income 534
-----
NET REALIZED GAIN (LOSS) ON:
Investments Sold 202
Foreign Currency Transactions 22
Futures Contracts (2)
-----
Net Realized Gain 222
-----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 135
Foreign Currency Translations 12
Futures Contracts 3
-----
Change in Unrealized Appreciation/Depreciation 150
-----
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 372
-----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 906
-----
-----
</TABLE>

- ---------------

* Commencement of operations

- ---------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2,
1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- ---------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 534
Net Realized Gain 222
Change in Unrealized Appreciation/Depreciation 150
-------
Net Increase in Net Assets Resulting from Operations 906
-------
DISTRIBUTIONS:
Net Investment Income (526)
Net Realized Gain (150)
-------
Total Distributions (676)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 20,590
Distributions Reinvested 676
Redeemed (8,736)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 12,530
-------
Total Increase in Net Assets 12,760
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $2) $12,760
-------
-------
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,970
Shares Issued on Distributions Reinvested 65
Shares Redeemed (810)
-------
Net Increase in Capital Shares Outstanding 1,225
-------
-------
- ---------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

74
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- -------------------------------------------------------------------------------------------------------

INVESTMENT INCOME:
Interest $ 778
Dividends 21
------
Total Income 799
------
EXPENSES:
Investment Advisory Fees 49
Less: Fees Waived (49)
------
Net Investment Advisory Fees --
Professional Fees 53
Administrative Fees 24
Shareholder Reports 22
Custodian Fees 7
Directors' Fees and Expenses 1
Other 8
Expenses Reimbursed by Adviser (36)
------
Net Expenses 79
------
Net Investment Income 720
------
NET REALIZED GAIN ON:
Investments Sold 191
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 332
------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation 523
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,243
------
------
</TABLE>

- ---------------

* Commencement of operations

- ---------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD FROM JANUARY 2, 1997*
TO DECEMBER 31, 1997
(000)
<S> <C>
- -------------------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 720
Net Realized Gain 191
Change in Unrealized Appreciation/Depreciation 332
-------
Net Increase in Net Assets Resulting from Operations 1,243
-------
DISTRIBUTIONS
Net Investment Income (719)
Net Realized Gain (147)
-------
Total Distributions (866)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 11,950
Distributions Reinvested 257
Redeemed (94)
-------
Net Increase in Net Assets Resulting from Capital Share Transactions 12,113
-------
Total Increase in Net Assets 12,490
NET ASSETS:
Beginning of Period --
-------
End of Period (Including undistributed net investment income of $2) $12,490
-------
-------
- -------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,164
Shares Issued on Distributions Reinvested 24
Shares Redeemed (9)
-------
Net Increase in Capital Shares Outstanding 1,179
-------
-------
- -------------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>

The accompanying notes are an integral part of the financial statements.

75
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 3, 1997*
SELECTED PER SHARE DATA AND RATIOS TO DECEMBER 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.01
Net Realized and Unrealized Loss (4.36)
-------
Total From Investment Operations (4.35)
-------
DISTRIBUTIONS
Net Investment Income (0.01)
-------
Total Distributions (0.01)
-------
NET ASSET VALUE, END OF PERIOD $ 5.64
-------
-------
TOTAL RETURN (43.52)%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $12,571
Ratio of Expenses to Average Net Assets 1.35%**
Ratio of Expenses to Average Net Assets Excluding
Interest Expense and Foreign Tax Expense 1.20%**
Ratio of Net Investment Income to Average Net Assets 0.32%**
Portfolio Turnover Rate 130%
Average Commission Rate:
Per Share $0.0134
As a Percentage of Trade Amount 0.50%
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.10%**
Net Investment Loss to Average Net Assets (1.43)%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

76
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED OCTOBER 1, 1996*
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1997* TO DECEMBER 31, 1996
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.78 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.01
Net Realized and Unrealized Loss -- (0.21)
------- -------
Total From Investment Operations 0.04 (0.20)
------- -------
DISTRIBUTIONS
Net Investment Income (0.07) (0.02)
Net Realized Gain (0.02) --
In Excess of Net Realized Gain (0.28) --
------- -------
Total Distributions (0.37) (0.02)
------- -------
NET ASSET VALUE, END OF PERIOD $ 9.45 $ 9.78
------- -------
------- -------
TOTAL RETURN 0.52% (2.03)%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $34,098 $11,789
Ratio of Expenses to Average Net Assets 1.80% 1.79%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense and Foreign Tax Expense 1.75% 1.75%**
Ratio of Net Investment Income to Average Net Assets 0.47% 0.32%**
Portfolio Turnover Rate 87% 9%
Average Commission Rate
Per Share $0.0018 $0.0013
As a Percentage of Trade Amount 0.40% 0.45%
- ---------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income $ 0.17 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.12% 6.17%**
Net Investment Loss to Average Net Assets (1.84)% (4.06)%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

77
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997
<S> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08
Net Realized and Unrealized Gain 1.92
-------
Total From Investment Operations 2.00
-------
DISTRIBUTIONS
Net Investment Income (0.08)
Net Realized Gain (0.18)
-------
Total Distributions (0.26)
-------
NET ASSET VALUE, END OF PERIOD $ 11.74
-------
-------
TOTAL RETURN 20.04%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $14,707
Ratio of Expenses to Average Net Assets 1.15%**
Ratio of Net Investment Income to Average Net Assets 1.24%**
Portfolio Turnover Rate 20%
Average Commission Rate:
Per Share $0.0350
As a Percentage of Trade Amount 0.25%
- -------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.43%**
Net Investment Loss to Average Net Assets (0.04)%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

78
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
INTERNATIONAL MAGNUM PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997
<S> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.13
Net Realized and Unrealized Gain 0.59
-------
Total From Investment Operations 0.72
-------
DISTRIBUTIONS
Net Investment Income (0.32)
Net Realized Gain (0.02)
-------
Total Distributions (0.34)
-------
NET ASSET VALUE, END OF PERIOD $ 10.38
-------
-------
TOTAL RETURN 7.31%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $18,855
Ratio of Expenses to Average Net Assets 1.16%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.15%**
Ratio of Net Investment Income to Average Net Assets 1.43%**
Portfolio Turnover Rate 41%
Average Commission Rate:
Per Share $0.0181
As a Percentage of Trade Amount 0.20%
- -------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.15
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.78%**
Net Investment Loss to Average Net Assets (0.19)%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

79
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EQUITY GROWTH PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
SELECTED PER SHARE DATA AND RATIOS TO DECEMBER 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02
Net Realized and Unrealized Gain 3.27
-------
Total From Investment Operations 3.29
-------
DISTRIBUTIONS
Net Investment Income (0.02)
Net Realized Gain (0.53)
-------
Total Distributions (0.55)
-------
NET ASSET VALUE, END OF PERIOD $ 12.74
-------
-------
TOTAL RETURN 33.05%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $12,419
Ratio of Expenses to Average Net Assets 0.85%**
Ratio of Net Investment Income to Average Net Assets 0.41%**
Portfolio Turnover Rate 172%
Average Commission Rate Per Share $0.0542
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.05%**
Net Investment Loss to Average Net Assets (0.80)%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

80
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MID CAP VALUE PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
SELECTED PER SHARE DATA AND RATIOS TO DECEMBER 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02
Net Realized and Unrealized Gain 4.05
-------
Total From Investment Operations 4.07
-------
DISTRIBUTIONS
Net Investment Income (0.02)
Net Realized Gain (0.73)
-------
Total Distributions (0.75)
-------
-------
NET ASSET VALUE, END OF PERIOD $ 13.32
-------
-------
TOTAL RETURN 40.93%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $11,461
Ratio of Expenses to Average Net Assets 1.05%**
Ratio of Net Investment Income to Average Net Assets 0.19%**
Portfolio Turnover Rate 141%
Average Commission Rate Per Share $0.0490
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.13%**
Net Investment Loss to Average Net Assets (0.89)%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

81
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 3, 1997*
TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17
Net Realized and Unrealized Gain 1.61
-------
Total From Investment Operations 1.78
-------
DISTRIBUTIONS
Net Investment Income (0.17)
Net Realized Gain (0.20)
-------
Total Distributions (0.37)
-------
NET ASSET VALUE, END OF PERIOD $ 11.41
-------
-------
TOTAL RETURN 17.99%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $13,055
Ratio of Expenses to Average Net Assets 1.10%**
Ratio of Net Investment Income to Average Net Assets 3.14%**
Portfolio Turnover Rate 114%
Average Commission Rate Per Share $0.0542
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.32%**
Net Investment Income to Average Net Assets 1.92%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

82
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
VALUE PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
SELECTED PER SHARE DATA AND RATIOS TO DECEMBER 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10
Net Realized and Unrealized Gain 1.99
-------
Total From Investment Operations 2.09
-------
DISTRIBUTIONS
Net Investment Income (0.10)
In Excess of Net Investment Income 0.00+
Net Realized Gain (0.21)
In Excess of Net Realized Gain 0.00+
-------
Total Distributions (0.31)
-------
NET ASSET VALUE, END OF PERIOD $ 11.78
-------
-------
TOTAL RETURN 20.98%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $14,664
Ratio of Expenses to Average Net Assets 0.85%**
Ratio of Net Investment Income to Average Net Assets 1.70%**
Portfolio Turnover Rate 34%
Average Commission Rate Per Share $0.0585
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.87%**
Net Investment Income to Average Net Assets 0.68%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized
+ Amount is less than $0.01 per share.

The accompanying notes are an integral part of the financial statement.

83
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 16, 1997*
SELECTED PER SHARE DATA AND RATIOS TO DECEMBER 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.28
Net Realized and Unrealized Loss (0.22)
-------
Total From Investment Operations 0.06
-------
DISTRIBUTIONS
Net Investment Income (0.27)
Net Realized Gain (0.02)
In Excess of Net Realized Gain (0.10)
-------
Total Distributions (0.39)
-------
NET ASSET VALUE, END OF PERIOD $ 9.67
-------
-------
TOTAL RETURN 0.76%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $26,378
Ratio of Expenses to Average Net Assets 1.35%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.30%**
Ratio of Net Investment Income to Average Net Assets 8.10%**
Portfolio Turnover Rate 173%
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.06%**
Net Investment Income to Average Net Assets 7.39%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

84
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FIXED INCOME PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
SELECTED PER SHARE DATA AND RATIOS TO DECEMBER 31, 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.46
Net Realized and Unrealized Gain 0.53
-------
Total From Investment Operations 0.99
-------
DISTRIBUTIONS
Net Investment Income (0.45)
Net Realized Gain (0.13)
-------
Total Distributions (0.58)
-------
NET ASSET VALUE, END OF PERIOD $ 10.41
-------
-------
TOTAL RETURN 9.93%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $12,760
Ratio of Expenses to Average Net Assets 0.70%**
Ratio of Net Investment Income to Average Net Assets 5.66%**
Portfolio Turnover Rate 185%
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.71%**
Net Investment Income to Average Net Assets 4.65%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

85
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
HIGH YIELD PORTFOLIO

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1997*
TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1997
<S> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63
Net Realized and Unrealized Gain 0.72
-------
Total From Investment Operations 1.35
-------
DISTRIBUTIONS
Net Investment Income (0.63)
Net Realized Gain (0.13)
-------
Total Distributions (0.76)
-------
NET ASSET VALUE, END OF PERIOD $ 10.59
-------
-------
TOTAL RETURN 13.53%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $12,490
Ratio of Expenses to Average Net Assets 0.81%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 0.80%**
Ratio of Net Investment Income to Average Net Assets 7.41%**
Portfolio Turnover Rate 78%
- ---------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.68%**
Net Investment Income to Average Net Assets 6.53%**
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of operations
** Annualized

The accompanying notes are an integral part of the financial statements.

86
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997

- --------------------------------------------------------------------------------

Morgan Stanley Universal Funds, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of December 31, 1997, the Fund was comprised of eleven separate
active portfolios (individually referred to as a "Portfolio", collectively as
the "Portfolios"). The Emerging Markets Equity Portfolio commenced operations on
October 1, 1996. The Global Equity, International Magnum, Equity Growth, Mid Cap
Value, Value, Fixed Income and High Yield Portfolios each commenced operations
on January 2, 1997. The Asian Equity and U.S. Real Estate Portfolios each
commenced operations on March 3, 1997 and the Emerging Markets Debt Portfolio
commenced operations on June 16, 1997.

The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies.

A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.

1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date, for which market quotations are readily available, are valued at
the mean between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which are based primarily on institutional size trading in similar
groups of securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.

2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.

A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as these amounts are earned.
Taxes may also be based on the movement of foreign currency and are accrued
based on the value of investments denominated in such currency.

3. REPURCHASE AGREEMENTS: Each Portfolio may enter into repurchase agreements
under which a Portfolio lends cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In connection
with transactions in repurchase agreements, a bank as custodian for the Fund
takes possession of the underlying securities which are held as collateral, with
a market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.

4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:

- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;

- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.

Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities are treated as ordinary income
for U.S. Federal income tax purposes.

87
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997

- --------------------------------------------------------------------------------

Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized between the
trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are reflected as
a component of unrealized appreciation (depreciation) on the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period is
reflected on the Statement of Operations.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.

Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ. In the absence of
trading of the foreign shares in such markets, the Portfolios value the foreign
shares at the closing exchange price of the local shares. Such securities are
identified as fair valued in the Statement of Net Assets.

5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Portfolios may enter into foreign
currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A foreign currency exchange contract is an agreement between two parties
to buy or sell currency at a set price on a future date. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by the
Portfolios as unrealized gain or loss. The Portfolios record realized gains or
losses when the contract is closed equal to the difference between the value of
the contract at the time is was opened and the value at the time it was closed.
Risk may arise upon entering into these contracts from the potential inability
of counterparties to meet the terms of their contracts and is generally limited
to the amount of the unrealized gain on the contracts, if any, at the date of
default. Risks may also arise from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.

6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
either a segregated account in which it maintains liquid assets in an amount at
least equal in value to the Portfolio's commitments to purchase such securities
or designates such assets as segregated on the custodian's records for the
Portfolio's regular custody account. Purchasing securities on a forward
commitment or when-issued or delayed-delivery basis may involve a risk that the
market price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of delivery.

7. LOAN AGREEMENTS: The Portfolios may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of sovereign
debt obligations and one or more financial institutions ("Lenders") deemed to be
creditworthy by the investment adviser. A Portfolio's investments in Loans may
be in the form of participations in Loans ("Participations") or assignments of
all or a portion of Loans ("Assignments") from third parties. A Portfolio's
investment in Participations typically results in the Portfolio having a
contractual relationship with only the Lender and not with the borrower. The
Portfolio has the right to receive payments of principal, interest and any fees
to which it is entitled only upon receipt by the Lender of the payments from the
borrower. The Portfolio generally has no right to enforce compliance by the
borrower with the terms of the loan agreement. As a result, the Portfolio may be
subject to the credit risk of both the borrower and the Lender that is selling
the Participation. When a Portfolio purchases Assignments from Lenders, it
acquires direct rights against the borrower on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

8. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Emerging Markets Equity Portfolio's commencement of operations. Morgan
Stanley Asset Management Inc. has agreed that in the event any of its initial
shares which comprised the Fund at inception are redeemed, the proceeds on
redemption will be

88
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997

- --------------------------------------------------------------------------------
reduced by the pro-rata portion of any unamortized organizational costs in the
same proportion as the number of shares redeemed bears to the initial shares
held at time of redemption.

9. STRUCTURED SECURITIES: Certain Portfolios may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with or purchase by an entity of specified instruments and
the issuance by that entity of one or more classes of securities ("Structured
Securities") backed by, or representing interests in, the underlying
instruments. Structured Securities generally will expose the Portfolio to credit
risks of the underlying instruments as well as of the issuer of the structured
security. Structured securities are typically sold in private placement
transactions with no active trading market. Investments in Structured Securities
may be more volatile than their underlying instruments, however, any loss is
limited to the amount of the original investment.

10. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security index, instrument or basket of
instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based upon
their quoted daily settlement prices; changes in initial settlement value
(represented by cash paid to or received from brokers as "variation margin") are
accounted for as unrealized appreciation (depreciation). When futures contracts
are closed, the difference between the opening value at the date of purchase and
the value at closing is recorded as realized gains or losses in the Statement of
Operations.

Certain Portfolios may use futures contracts in order to manage its exposure to
the stock and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs. Futures
contracts involve market risk in excess of the amounts recognized in the
Statement of Net Assets. Risks arise from the possible movements in security
values underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which may
not correlate with the change in value of the hedged investments. In addition,
there is the risk that a Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market.

11. SWAP AGREEMENTS: The Portfolios may enter into swap agreements to exchange
one return or cash flow for another return or cash flow in order to hedge
against unfavorable changes in the value of securities or to remain fully
invested and to reduce transaction costs. The following summarizes swaps which
may be entered into by the Portfolios:

INTEREST RATE SWAPS: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.

TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security, instrument or basket of instruments underlying
the transaction exceeds or falls short of the offsetting interest obligation,
the Portfolio will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as unrealized
gains or losses in the Statement of Operations. Periodic payments received or
made at the end of each measurement period, but prior to termination, are
recorded as realized gains or losses in the Statement of Operations.

Realized gains or losses on maturity or termination of interest rate and total
return swaps are presented in the Statement of Operations. Because there is no
organized market for these swap agreements, the value reported in the Statement
of Net Assets may differ from that which would be realized in the event the
Portfolio terminated its position in the agreement. Risks may arise upon
entering into these agreements from the potential inability of the
counterparties to meet the terms of the agreements and are generally limited to
the amount of net interest payments to be received and/or favorable movements in
the value of the underlying security, instrument or basket of instruments, if
any, at the date of default.

12. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date (except for certain foreign dividends which may
be recorded as soon as the Fund is informed of such dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on securities purchased (other than
mortgage-backed securities) are amortized according to the effective yield
method over their respective lives. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are apportioned among the Portfolios based upon relative net assets.
Distributions from the Portfolios are recorded on the ex-distribution date.

The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of

89
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997

- --------------------------------------------------------------------------------
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of their cost.

The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for the character and timing
of the recognition of gains or losses on securities and foreign currency
exchange contracts, the timing of the deductibility of certain foreign taxes and
dividends received from real estate investment trusts.

Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.

Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated net
investment loss for the purpose of calculating net investment income (loss) per
share in the Financial Highlights.

Settlement and registration of foreign securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible the Portfolio could lose its share
registration through fraud, negligence or even mere oversight. In addition,
shares being delivered for sales and cash being paid for purchases may be
delivered before the exchange is complete. This may subject the Portfolio to
further risk of loss in the event of a failure to complete the transaction by
the counterparty.

B. ADVISERS: Morgan Stanley Asset Management Inc. ("MSAM"), a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., provides the
following Portfolios with investment advisory services for a fee, paid
quarterly, at the annual rate based on average daily net assets as follows:

<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION THAN
PORTFOLIO $500 MILLION TO $1 BILLION $1 BILLION
- -------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Asian Equity.............. 0.80% 0.75% 0.70%
Emerging Markets Equity... 1.25 1.20 1.15
Global Equity............. 0.80 0.75 0.70
International Magnum...... 0.80 0.75 0.70
Equity Growth............. 0.55 0.50 0.45
U.S. Real Estate.......... 0.80 0.75 0.70
Emerging Markets Debt..... 0.80 0.75 0.70
</TABLE>

Miller Anderson & Sherrerd, LLP ("MAS"), a wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., provides the following Portfolios with
investment advisory services for a fee, paid quarterly, at the annual rate based
on average daily net assets as follows:

<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION THAN
PORTFOLIO $500 MILLION TO $1 BILLION $1 BILLION
- -------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Mid Cap Value............. 0.75% 0.70% 0.65%
Value..................... 0.55 0.50 0.45
Fixed Income.............. 0.40 0.35 0.30
High Yield................ 0.50 0.45 0.40
</TABLE>

MSAM and MAS have agreed to reduce fees payable to them and to reimburse the
Portfolios, if necessary, to the extent that the annual operating expenses, as
defined, expressed as a percentage of average daily net assets, exceed the
maximum ratios indicated as follows:

<TABLE>
<CAPTION>
PORTFOLIO MAXIMUM EXPENSE RATIO
- --------------------------------------------- ---------------------
<S> <C>
Asian Equity................................. 1.20%
Emerging Markets Equity...................... 1.75
Global Equity................................ 1.15
International Magnum......................... 1.15
Equity Growth................................ 0.85
Mid Cap Value................................ 1.05
U.S. Real Estate............................. 1.10
Value........................................ 0.85
Emerging Markets Debt........................ 1.30
Fixed Income................................. 0.70
High Yield................................... 0.80
</TABLE>

C. ADMINISTRATORS: MSAM and MAS (the "Administrators") also provide their
respective Portfolios with administrative services pursuant to an administrative
agreement for a monthly fee which on an annual basis equals 0.25% of the average
daily net assets of each Portfolio, plus reimbursement of out-of-pocket
expenses. Under agreements between the Administrators and Chase Global Funds
Services Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank
("Chase"), CGFSC provides certain administrative services to the Fund. For such
services, each Administrator pays CGFSC a portion of the fee the Administrators
receive from the Fund. Certain employees of CGFSC are officers of the Fund. In
addition, the Fund incurs local administration fees in connection with doing
business in certain emerging market countries.

D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., acts as custodian for the Fund's
assets held outside the United States in accordance with a custodian agreement.
Chase serves as custodian for the Fund's domestic assets in accordance with a
separate custodian agreement. Custodian fees are computed and payable monthly
based on assets held, investment purchases and sales activity, an account
maintenance fee, plus reimbursement for certain out-of-pocket expenses. For the
year ended

90
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997

- --------------------------------------------------------------------------------
December 31, 1997, the following Portfolios incurred custody fees with and had
amounts payable to MSTC at December 31, 1997:

<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
PORTFOLIO (000) (000)
- ------------------------------ ----------------- ---------------------
<S> <C> <C>
Asian Equity.................. $ 64 $ 15
Emerging Markets Equity....... 190 40
Global Equity................. 16 4
International Magnum.......... 92 20
Emerging Markets Debt......... 12 4
</TABLE>

In addition, for the year ended December 31, 1997, the following Portfolios have
earned interest income and incurred interest expense on balances with MSTC as
follows:

<TABLE>
<CAPTION>
INTEREST
INCOME INTEREST
PORTFOLIO (000) EXPENSE (000)
- --------------------------------------------- ----------- -------------
<S> <C> <C>
Asian Equity................................. $ -- $ 10
Emerging Markets Equity...................... 3 3
Emerging Markets Debt........................ 1 4
</TABLE>

E. DIRECTORS' FEES: The Fund and other funds managed by MSAM (the "Fund
Complex") pays each Director, who is not an officer or affiliated person, an
aggregate annual fee of $65,000, plus out-of-pocket expenses. Such fees are
allocated among the funds in the Fund Complex in proportion to their respective
average net assets.

F. OTHER: During the year ended December 31, 1997, the following Portfolios paid
brokerage commissions to Morgan Stanley & Co. Incorporated, an affiliated
broker/dealer, as follows:

<TABLE>
<CAPTION>
BROKERAGE
COMMISSIONS
PORTFOLIO (000)
- ------------------------------------------------ -------------------
<S> <C>
Asian Equity.................................... $ 2
Emerging Markets Equity......................... 7
Global Equity................................... 2
</TABLE>

At December 31, 1997, the net assets of certain Portfolios were substantially
comprised of foreign denominated securities and currency. Changes in currency
exchange rates will affect the U.S. dollar value of and investment income from
such securities.

From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.

91
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS

- --------------------------------------------------------------------------------

To the Board of Directors and Shareholders of
Morgan Stanley Universal Funds, Inc.

In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
each of the portfolios constituting Morgan Stanley Universal Funds, Inc.
(hereafter referred to as the "Fund") at December 31, 1997, and the results of
each of their operations, the changes in each of their net assets and the
financial highlights for each of periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodians and brokers, and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 12, 1998

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MORGAN STANLEY UNIVERSAL FUNDS, INC.
FEDERAL TAX INFORMATION (UNAUDITED)

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For the year ended December 31, 1997, the percentages of distributions taxable
as ordinary income, as reported on Form 1099-DIV, that qualify for the dividends
received deduction for corporations for the Global Equity, Equity Growth, Mid
Cap Value, Value and High Yield Portfolios are 10.7%, 7.2%, 6.4%, 30.5% and
2.3%, respectively.

For the year ended December 31, 1997, the Emerging Markets Equity Portfolio has
designated a 28% long-term capital gain of approximately $117,000.

For the year ended December 31, 1997, the International Magnum Portfolio intends
to pass through to shareholders foreign tax credits of approximately $40,000 and
has derived gross income from sources within foreign countries in the amount of
approximately $310,000.

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MORGAN STANLEY UNIVERSAL FUNDS, INC.

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DIRECTORS

Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley Asset Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated

Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated

John D. Barrett II
Chairman and Director,
Barrett Associates, Inc.

Gerard E. Jones
Partner, Richards & O'Neil LLP

Andrew McNally IV
River Road Partners

Samuel T. Reeves
Chairman of the Board and CEO,
Pinacle L.L.C.

Fergus Reid
Chairman and Chief Executive Officer,
LumeLite Plastics Corporation

Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin & Boehm, P.C.

INVESTMENT ADVISERS AND ADMINISTRATORS

Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020

Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899

DISTRIBUTOR

Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, NY 10020

CUSTODIANS

Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210

The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245

OFFICERS

Harold J. Schaaff, Jr.
VICE PRESIDENT

Joseph P. Stadler
VICE PRESIDENT

Lorraine Truten
VICE PRESIDENT

Stefanie V. Chang
VICE PRESIDENT

Valerie Y. Lewis
SECRETARY

Joanna M. Haigney
TREASURER

Rene J. Feuerman
ASSISTANT TREASURER

Karl O. Hartmann
ASSISTANT SECRETARY

LEGAL COUNSEL

Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036

THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
THE PROSPECTUS OF THE MORGAN STANLEY UNIVERSAL FUNDS, INC. WHICH DESCRIBES IN
DETAIL EACH INVESTMENT PORTFOLIO'S INVESTMENT POLICIES, FEES AND EXPENSES.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
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